The bull market has lasted nearly six years now, and throughout the market, investors have complained loudly that fewer and fewer stocks offer potential shareholders the strong returns they seek. High-priced stocks abound, and while some of them have strong businesses backing up their share prices and rewarding shareholders willing to take the risks of owning them, others look riskier than their high prices can justify.
Foolish investors know that investing in stocks that are overly expensive can lead to bad results. That's why three Motley Fool contributors have stepped up to explain why they think Clorox (CLX 0.20%), Waste Management (WM -0.42%), and WebMD Health (WBMD) don't have the risk-reward proposition investors should take right now.
Tamara Walsh (Clorox): More than 80% of Clorox's brands are leaders in their respective categories, including its namesake brand, Clorox, as well as others like Brita, Burt's Bees, and Glad. This translates into pricing power and enables the company to successfully raise prices of certain brand products to help offset rising commodity costs. Shares of Clorox climbed more than 26% last year, outpacing a mere 12% rise in the S&P 500 over the same period.
Source: Clorox.
Nevertheless, the stock looks wildly overpriced today, with shares of Clorox now trading around $108 each, or at the high end of the stock's 52-week range. Sure, Clorox benefits from a strong portfolio of brands. Yet, much of this optimism is already priced into the stock. For example, the stock currently has a price-to-earnings-growth ratio of 3.71, which is markedly above the industry average PEG of 3. 39. The stock's P/E ratio of 25 is also higher than the S&P 500's median P/E of 20.
Together, these things tell us that Clorox stock is expensive at its current levels. With shares of Clorox trading near all-time highs, there is little room for error. Ultimately, it isn't worth betting on this stock at its current price -- particularly considering Clorox generates almost 40% of its sales from segments that are commoditized, such as bleach.
Alex Planes (Waste Management): For years, investors have been told that Waste Management is a great dividend stock in which to park your money, because everyone needs to get rid of their trash. That drumbeat of perceived stability has given Waste Management shareholders a double over the past five years, if they've reinvested their dividends. That sounds great until you realize that effectively all of that growth has been the result of expanding valuations, not a strengthening business:
WM Total Return Price data by YCharts.
Waste Management's current triple-digit P/E is the result of a massive write-off of the company's goodwill in its waste-to-energy business that should soon be off the books. However, this write-off still doesn't excuse Waste Management from the fact that it has not managed to grow its two core profitability metrics -- adjusted EPS or free cash flow per share -- over the past five years, even as its top line has grown by nearly 20%:
WM Total Return Price data by YCharts.
The result of this divergence is that Waste Management's adjusted P/E ratio is now at decade highs, and its price-to-free-cash-flow ratio is approaching decade highs as well. The last time Waste Management's P/E hit such heights was during the aftermath of a massive accounting scandal that forced the company to pay nearly half a billion dollars in penalties and mark down its earnings for the latter 1990s by more than a billion dollars.
Source: Waste Management.
It can be hard to find good, reliable dividend stocks in this market, and Waste Management's business model seems rock-solid. However, it seems difficult to argue that it's still worth your money today after five years of mediocrity during a period in which many of its large, dividend-paying peers have produced significantly more growth on both a share-price and a fundamental basis.
Dan Caplinger (WebMD Health): I'm skeptical about the huge gains that Internet-based health-information provider WebMD Health has enjoyed over the past two years, with shares having tripled since late 2012. Investors have high hopes for the company based on its recent new Healthy Target program, in which users of WebMD's iPhone app can draw biometric data from various wearable fitness monitors and other medical devices and display them in a format that offers personalized health advice. The problem, though, is that major tech players Apple, Google, and Facebook are also moving heavily into the space, and despite WebMD's greater experience in dealing with health-related information, the company could struggle to compete against the resources that wearable-device makers will be willing to put behind their efforts.
Source: WebMD.
Even after a 20% pullback from its highs in mid-2014, WebMD Health still trades at more than 45 times trailing earnings. Admittedly, that's relatively low for many Internet stocks, yet investors don't expect much more than 10% growth from WebMD over the next several years. Given the need for accelerated growth to justify current valuations and the difficulty in producing that growth in the face of strong competitors, I don't think WebMD Health offers the best risk-reward proposition for investors right now.
