In this segment from Market Foolery, Chris Hill and Matt Argersinger discuss the broad market and the bullish momentum building for some of the biggest companies out there. But when the market is already trading at unusually high levels by any measure, it makes picking winning stocks harder -- and raises some red flags, too.
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A full transcript follows the video.
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This video was recorded on April 25, 2017.
Chris Hill:Alot of companies reporting earnings today,but I think we have to startwith the market in general. You have the Nasdaq hitting 6,000, which is of course making headlines becauseit's a big round number. Buthow about this for a list of companies:Home Depot,Lowe's,McDonald's,John Deere,Honeywell,UnitedHealth,3M,Mastercard,PayPal,Adobe,Electronic Arts,Activision Blizzard,Microsoft,Alphabet, andFacebook, they are all, all of them, hitting all-time highs today.
Matt Argersinger:That'spretty much everything, I think.
Hill:Yeah. That'snot just tech,it's healthcare, it's home improvement, it'srestaurants.
Argersinger:Across the board.
Hill:It'sacross the board. And I'm wondering, how problematic is this forsomeone in your position, whose job is to go out and look for companies --we talk about upside, and yes,these companies are hitting all-time highs today. Let'sgo ahead and stipulate that all of them will go up from here, which means this is not the only all-time high they're going to have.
Argersinger:It shouldn't be.
Hill:But, forsomeone in your position,I don't know, this seems like a little bit of a problem.
Argersinger:You feel two ways about it. One way,you're saying, this is great. You are an investor, you like equity --
Hill:This iswhy we invest.
Argersinger:This is why we invest,we invest for companies to hit all-time highs, we investfor the stock market as a whole to hit an all-time high, we invest for theNasdaq 6,000 and 7,000 and 8,000 and beyond. Theother part of me is an analyst, an equity analyst,and I'm constantly looking for those excess returns. Andif everything is going on and hitting all-time highs, it gets really hard. Especiallyif you look at the overall market,we're using certain historical measures at really high valuations. Youdon't want to get excited when you look at companies -- and, we'lltalk about one that I think is overvalued -- welook at a lot of companies that aremaybe going to growrevenue in the single-digit range, which is fine. But they're trading at 20 , 25, 30 times earnings multiples.It'shard to get excited about companies like that. The other thing, I think, that'sworking, and we've talked about this on the show, how the really bigsecular shift that we've seen towardpassive investing, ETFs, what that's done is sent a lot of money to verybroad indexes in the market that are essentially,because capital is coming in, they have to keep buying.I'm not surprised that a lot of the blue chip companies you named out are hitting all time highs. That'ssometimes a function of the fact thatmoney is coming into the market, it'scoming into thesepassive strategies, it's coming in through people's 401(k)s, all various sources. Until that changes,until there's some kind of major dislocation in the market that changes that, or changes people's perception, it's very hard to keep up with all these companies.
Hill:Some ofthe companies we just went through,particularly Facebook, Alphabet,Microsoft,those are three of the five or six biggest companies in the public markets. Do you think that, as these stocks rise, as the big get bigger,does that increase the likelihood of buyouts of smaller companies? If you'reFacebook orMastercard,are you taking your all-time high stock andputting it to use in the form of buying out smaller competition --not necessarily competition, but like, "We could use our all-time high stock to go out and buy that company over there."
Argersinger:I thinkthat's a great point. If you're a capitalallocator -- that'swhat a CEO is, at his or her core, a good capital allocator. As a capital allocator, if I saw my stock trading at what I thought was a very lofty valuation, I wouldn't be buying back my stock, I wouldabsolutely be either issuing stock,if that was the cheapest form of capital,or like you said, I would be looking at competitors out there and saying, "Wow,if I could use my equity as a cheap form of capital and buying power,I'm going to go buy a competitor." The biggetting bigger is a great point as well. I think,if you look at Facebook, Alphabet too, the amount of capital that thesecompanies can put to work,it makes it very hard. As big asSnapis already, Facebook cango in there and pour $1 billion.Amazonisanother example of a company that's pouringsomething like $3 billion in India, whereasFlipkart is a company that's beenoperating in India for a long time,over a decade now. Amazon can go in there in a few years and probablyknock them out of the market,just because of their sheer size andaccess to capital. The big getting bigger is apretty interesting thing to watch.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fools board of directors. LinkedIn is owned by Microsoft.Chris Hill owns shares of Amazon. Matthew Argersinger owns shares of Activision Blizzard and Amazon. Matthew Argersinger has the following options: short December 2017 $800 puts on Amazon. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Mastercard, and PayPal Holdings. The Motley Fool recommends Adobe Systems, Electronic Arts, Home Depot, Lowe's, and UnitedHealth Group. The Motley Fool has a disclosure policy.