My first introduction to bleach was in college. I added it to a laundry of my most colorful T-shirts, believing it would make the colors brighter. I still don't know what I did wrong, but they all came out looking as if they'd been tossed into a Paint 'n Swirl. Fortunately, this was the '80s, and it turned out to be a fashion statement.
Today, bleach has a different connotation for me. Anytime there's a stock market meltdown, such as we saw in 2008-2009, the investment pundits always talk about the "flight to quality." They urge us to buy the stocks that have been around forever because of their "safety." Clorox
On the surface, it seems to make sense. Clorox makes tons of consumer staples -- from its namesake bleach to Armor All, Glad bags, Pine Sol, and Hidden Valley salad dressings. In that regard, it has a diversified consumer products offering much like those of larger competitors Procter & Gamble
Yeah, like P&G and Kraft, Clorox is a fine company with a good balance sheet -- manageable debt, cash on hand, cash flow in excess of interest expense. OK, so consensus estimates have it growing earnings 11% this year over last. That's fine. And it does have a 3.2% dividend.
But here's my problem: I happen to look at the broader market and economy when making individual stock decisions. I have a higher tolerance for risk, and I'll take more risk when the market is crashing. Like other "safe" stocks, Clorox just doesn't offer that much chance for capital gain.
Last March, I expected outsized returns for taking a risk with my capital, and got them. I bought St. Joe Company
My issue with Clorox is but an example of a larger trend, especially as market sentiment has become more ebullient.
Right now, in large-cap stocks, I do not see premium returns given the overall risk to capital. Clorox's 11% growth estimates and 3.2% yield might be all right in certain circumstances. However, a PEG ratio of almost 1.4 on this year's earnings suggests to me that Clorox is an overvalued stock. Even at last year's low price of $46, it was still trading at a PEG ratio of 1.1. That still looked overpriced compared to the other opportunities I mentioned above.
More conservative investors than I might prefer Clorox -- in fact, the folks at Motley Fool Income Investor list it as an active recommendation. Others point out that it trades at a discount to its peers. All true. But I'm looking for outsized absolute returns, not relative ones.
Clorox is still good for bleaching shirts, but I might pick it up only when it's '80s night at my local hangout.
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Rick Steier owns shares of General Electric. Leucadia National is a Motley Fool Stock Advisor choice. Clorox and Procter & Gamble are Income Investor picks. The Fool owns shares of Procter & Gamble. The Motley Fool has a disclosure policy.