Potential Replacements for Heinz and Campbell Soup
Personally, I like to have a replacement in mind before I sell out of a holding. Since the Heinz transaction is outside of my control, I have begun researching prospective replacements. One company that has currently caught my eye is Emerson Electric Co. (NYSE:EMR). Although I’m not yet finished with my due diligence, replacing Heinz with Emerson Electric makes sense on several counts.
First of all, the current dividend yield on Emerson Electric is slightly higher than Heinz. Therefore, I will take no-hit on the income generation of the portfolio by replacing Heinz with Emerson Electric Co. (NYSE:EMR). Moreover, I feel that Emerson Electric is fairly valued and possesses the potential for more rapid growth in both earnings and dividends over the long run. I also like the fact that the debt to capital ratio on Emerson is approximately half of what it is on Heinz.
Currently my biggest dilemma is do I wait to get the Heinz cash, or bite the bullet and pay the commission to sell it in the open market? The risk of waiting for the cash would be that Emerson runs up in value before I get the cash, thereby moving out of fair valuation range. Consequently, although the decision to sell Heinz is more or less etched in stone, like the old Fram oil filter commercial, I have to decide whether I should “pay me now or pay me later.”
Emerson Electric Co. (NYSE:EMR)
As a potential replacement for Campbell Soup, I have begun researching Deere & Company (NYSE:DE). The current yield on Deere & Company is about the same, each company’s debt to capital ratio is similar, but I also see more growth potential with Deere & Company. At this point it’s important to state that I am only utilizing Deere as an example of a potential replacement, because there are other companies I am also currently exploring that are at fair value with similar yields.
Deere & Company (NYSE:DE)
Four Blue-Chip Holdings with Premium Historic Valuations
These next four examples present a real conundrum regarding what fair valuation might actually be. Each of these next four companies are recognized blue chips, and as such, each has a legacy where the market has historically been willing to apply a premium valuation to their shares (the dark blue line on the graphs). Personally, I accept that fact as revealed by the respective normal P/E ratios on the earnings and price correlated F.A.S.T. Graphs™ for each company.
Although the premium valuation normally applied by the market is undeniable, it’s up to the individual investor to decide whether they are willing to pay that premium or not. In my case, although I have long admired each of these companies, I patiently waited until the great recession afforded me the opportunity to purchase them at fair valuations. I do not like paying more for a company than I believe its fundamentals justify. However, now that I hold each at such a low cost basis, what should I do as each company is clearly moving back into their normal premium valuation ranges?
Do I consider them now overvalued, or do I acknowledge that they are trading at justified premiums due to the quality of each of these blue-chip stalwarts? In each of these four cases, I must accept that finding them at my strict definition of fair value is a very rare occurrence. But now that I have, do I count my blessings and hold on to them, or take my profits and run? I am not sure there is a right answer to this last question. In other words, the facts are what they are, leaving it up to each individual investor’s own judgment as to what to do. In my case, I’m holding on for now, but I am not willing to add new money at these levels either, but I would if they move back to fair value again.
McDonald’s Corporation (NYSE:MCD)
The Coca-Cola Company (NYSE:KO)
The Procter & Gamble Company (NYSE:PG)
Johnson & Johnson (NYSE:JNJ)
Two Great Companies Approaching Dangerous Overvaluation
Kimberly Clark Corp (NYSE:KMB) and Genuine Parts Company (NYSE:GPC) are two examples of companies that have moved into moderate overvaluation territory. Consequently, both are currently on my candidates-for-sell-list. However, once a company apparently becomes overvalued, I only flag it for sell, and then continuously monitor the position. In other words, I am not fond of reacting, or you could say overreacting, to every little wiggle in stock price. As I will
