Are U.S. Stocks in a Massive Bubble?

Dear investor,

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Today’s edition is how to invest in a world that looks more and more like it’s in a massive bubble. Let’s get started.

Are U.S. stocks really in a bubble?

Despite what the title of this post hinted towards, I won’t go out and loudly proclaim U.S. stocks are in a bubble. I can’t predict that, and I don’t think any of the people reading this can either.

The exercise is fraught with problems.

What valuation defines a bubble?

Why is today the tipping point?

Why can’t stocks stay expensive for a long time?

I’ve found that folks calling for a bubble never have good answers for these questions, mostly choosing to answer them with some variation of “because I think so, dammit.”

However, just because I think it’s almost impossible to predict a bubble, it doesn’t mean I’m rushing out and buying U.S. stocks today. I’m a value investor at heart, and I just can’t stomach these valuations. Especially for the top 100 or so S&P 500 stocks.

There’s no way I’m paying more than 30x earnings for Apple, 50x earnings for Costco, or 100x earnings for Tesla. I don’t care how bright the future looks, I just can’t do it.

That leaves me with two choices — wait out this “overvalued” market in cash, or start looking for cheaper stocks in other markets.

Option B sure sounds better to me, especially since it turns out there are tons of cheaper stocks in countries that aren’t the United States.

What about Canada?

Although the TSX is up 25%+ in the last year, I don’t think Canadian stocks are particularly expensive.

In fact, the TSX only has a P/E ratio of just over 17x. And that’s the trailing P/E ratio. If we look forward, the TSX trades in the 16x earnings range.

That’s much lower than the S&P 500, which as a P/E ratio of approximately 30x.

The Canadian market isn’t dominated by barely profitable tech stocks that are trading at nosebleed valuations. It’s filled with companies that have very tangible moats, ones that make products or deliver services that are downright boring — at least compared to companies that are CHANGING THE WORLD.

Just a few of the cheap stocks we have in Canada include:

• The country’s dominant specialty finance company, which is trading at 9x forward earnings and is projected to grow earnings by 10%+ in both 2025 and 2026. Goeasy (TSX:GSY)

• An interesting specialty manufacturer that makes railroad ties and power poles, which is trading at about 13x forward earnings. Stella Jones (TSX:SJ)

• A financial conglomerate with diverse holdings in insurance, wealth management, and various exciting fintech assets that’s trading at 8.7x forward earnings. Power Corporation (TSX:POW)

There are tons of these stocks in Canada, which we cover extensively in the premium version of this newsletter.

In fact, I just profiled a sin stock in the premium newsletter that trades at about 9x free cash flow and has just hiked its dividend by 25%.

How about Europe?

If Canada doesn’t have enough low priced stocks for you, then it’s maybe time to check out Europe.

The European market is filled with quality stocks that are trading for ridiculously low valuations.

You don’t need one of them fancy brokerage accounts that allows you to buy shares off the London, Paris, or Frankfurt stock exchanges, either. Many of these companies trade on U.S. stock exchanges using American Depository Receipts (ADRs). ADRs offer the exact same ownership stake as the shares themselves, but the shares are under deposit at a U.S. bank.

And most can be easily purchased from a Canadian brokerage account.

Some of these cheap European stocks with U.S. ADRs include:

• Roche Holding (OTC:RHHBY) is a Swiss-based pharma and medical device company that has grown its Swiss Franc dividends for 37 consecutive years. Trades at 13× forward earnings.

• British American Tobacco (NYSE:BTI) has a cash cow legacy tobacco business and a fast-growing smokeless nicotine business. It pays an 8%+ dividend that’s well covered by earnings. It trades at under 8x forward FCF.

• Pernod Ricard (OTC:PRNDY) is one of the world’s leading spirit companies with brands such as Absolut, Jameson, and Malibu. It has a consistent record of both growth and paying generous dividends. The current yield is 4.2%. It trades for 14x earnings.

Latin America too

One issue with North American investors is they’re often too scared to venture into other parts of the world.

They assume that emerging markets consist of companies that have to answer to dictators, which are located in volatile regions that suffer from hyperinflation or terrorism.

But that’s just not the case. In fact, with just a small amount of digging we can find pretty impressive companies located in nations with stable economies. These are companies that have solid moats, competitive positions that will survive any temporary weakness.

And, like the European companies listed, Canadian investors can easily buy them on American stock exchanges.

Here are some examples of interesting LATAM companies that look to be attractive today:

• Coca-Cola FEMSA (NYSE:KOF) is Latin America’s dominant Coca-Cola bottler. It has operations in Mexico, Colombia, Brazil, and a half dozen other LATAM markets. It offers a 4.6% dividend yield and consistent earnings growth over the last decade. It trades at just 13x forward earnings.

• Fomento Economico Mexicano, or FEMSA (NYSE:FMX) owns 47.2% of Coca-Cola FEMSA, along with other interesting assets like OXXO, the dominant LATAM convenience store chain. It’s also at a 52-week low and trades for a very reasonable 19x forward P/E while delivering higher growth potential than its Coca-Cola subsidiary.

• Grupo Aeroportuario del Centro Norte (NYSE:OMAB) holds concessions to develop, operate, and maintain airports in Mexico, including Monterrey, Acapulco, Mazatlan, and Zihuatanejo. It has a history of growth and pays some of the most generous dividends out there. It trades for just over 11x forward earnings.

The easy way

For those of you who would rather get your international stock exposure the easy way, let me talk a little bit about the Schwab International Equity ETF (NYSE:SCHY).

This is an ETF that holds 100 different international stocks, which are ranked by factors such as return on equity, consistent dividend payments and, perhaps most importantly, volatility. If a stock is too volatile it simply doesn’t make the fund.

SCHY is quite reasonably valued, with a P/E ratio of approximately 14x while also sporting a return on equity of more than 20%. It’s a nice alternative for lazy investors.

One thing I don’t like about it is the constant rebalancing. No one position can be more than 4% of the fund, meaning big winners will likely be sold before they become really big winners. The fund is well diversified however, and the managers are willing to make that tradeoff.

The bottom line

This week’s post is simple. There are few bargains in the S&P 500, and especially few in the largest companies of that index. We must look a little deeper to find value.

The good news is we don’t have to dig very deep. There are huge pockets of value in various markets in the world. Some of the best companies in Canada, Europe, Latin America, Australia, and Japan are trading at very attractive valuations. Plus they offer solid moats, interesting growth potential, and multiple expansion opportunities.

Investors have a couple of ways to play this phenomenon. They can either pick individual stocks themselves or, if they’re feeling a little lazy, go for a nice diverse international ETF. SCHY is one of the more interesting ones, and it does all of the work for you. It only charges 0.14% per year for that, which is a reasonable price to pay.

I choose to buy Canadian stocks with the odd foray into the U.S., Latin America, or Europe. You might choose a different path, and that’s fine. But one thing is for sure; the largest U.S. stocks are very expensive, and they’re not assets I want to own right now.

I’m with Buffett. I’d be selling.

Canadian Dividend Investing has one mission — to help our readers select excellent dividend stocks. 

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