Sometimes good companies aren't good buys, and this is not always a bad thing. Often it is a result of the market over reacting in a positive direction. The stocks simply become overvalued, but their underlying fundamentals remain excellent. Below are a couple of companies that fall into this group:
Illinois Tool Works Inc. (ITW) - Yield: 3.06% - 2 Stars - Analysis
Illinois ToolWorks Inc. is a diversified manufacturer operates a portfolio of about 750 industrial and consumer businesses located throughout the world. As you can see for the information below, price is all that is keeping ITW from being a 4 Star stock:
- Recent Price: $40.00
- 3 Star Price: $38.99
- 4 Star Price: $36.20
3M Co. is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications. Like ITW above, price is all that is keeping MMM from being a 4 Star stock:
- Recent Price: $72.00
- 3 Star Price: $57.44
- 4 Star Price: $44.43
BP Plc (BP) - Yield: 4.67% - 1 Star
This supermajor integrated oil company (formerly BP Amoco p.l.c.) is based in London and is the world's second largest publicly owned oil company and the fourth largest U.S. refiner. With Debt to Total Capital at an acceptable level and Free Cash Flow Payout at an undesirable level, a 3 Star rating is the best BP could earn at any price.
- Debt to Total Capital: 27%
- Free Cash Flow Payout: 69%
- Recent Price: $50.00
- 3 Star Price: $1.00
SUPERVALU INC. is one of the largest U.S. food wholesalers, this company is also one of the biggest supermarket retailers in the U.S. With Debt to Total Capital at an undesirable level and Free Cash Flow Payout at an acceptable level (but with some years negative), a 3 Star rating is the best SVU could earn at any price.
- Debt to Total Capital: 73%
- Free Cash Flow Payout: 42%
- Recent Price: $15.00
- 2 Star Price: $14.75
- 3 Star Price: $1.00
The Hershey Company engages in the manufacture, marketing, distribution, and sale of various types of chocolate and confectionery, refreshment and snack products, and food and beverage enhancers in the United States and internationally. With both Debt to Total Capital and Free Cash Flow Payout at undesirable levels, a 2 Star rating is the best HSY could muster at any price.
- Debt to Total Capital: 83%
- Free Cash Flow Payout: 88%
- Recent Price: $40.00
- 2 Star Price: $1.00
Before buying a stock with hopes things will soon improve, it is a good idea to run some sensitivities to see where, or if, the stock can make a recovery. Modeling is cheap, selling an undesirable stock usually isn't.
Full Disclosure: Long ITW, MMM, BP. See a list of all my income holdings here.
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