Blue Chip Stocks Crash as the Stock Market Gets More Expensive
While we are barely halfway through it, this year has been fascinating. On the surface, things appear fairly calm and, frankly, quite great. Dig down into the depths, though, and the turmoil is notable.
Consider, for example, the stock market. Investors are facing a particular interesting paradox at the moment. In our personal family estate, as well as for the asset book at Kennon-Green & Co., overall returns have continued to push higher fueled by a combination of seemingly ever-growing dividends paid out by slower growing cash cow businesses and capital gains on several of the cheap technology stocks we bought a couple years ago during the crash increasing both earnings and their valuation multiple. Simultaneously, many of the greatest blue chip stocks in the world have gone through a brutal correction and are now objectively quite cheap for long-term owners. Thus, we have a notable situation where the stock market looks increasingly expensive but, for value investors, there is a surfeit of opportunity if purchasing the types of companies you want to own for ten or twenty years. Somedays, the market itself barely moves yet individual components are rising or falling 15% to 20% in a single trading session.
I’m always more interesting in companies I want to own getting cheaper, so there is little to say about our biggest holdings, including Meta Platforms and Alphabet, which have been phenomenal. I’m also quite pleased with Microsoft and Adobe Systems, as well. No, let’s focus on the boring stuff; the bread and butter upon which I have built a lot of my personal wealth that has been out of favor.
Take The Hershey Company. I’ve told you for the better part of twenty-five years that, once or twice a decade, the stock becomes reasonably cheap both absolutely and relatively. It’s typically a good idea to load up on it when that happens. Shares were at over $275 each in May 2023. The worst cocoa crop in more than forty years sent commodity prices soaring, causing chocolate companies to take a hit. The stock fell to barely over $178, a drop of more than 35.2% in a fairly short period of time. Operations, meanwhile, look quite good with little to no change in the long-term intrinsic value of the business as society transitions through the inflationary environment and a return to normalized interest rates. The dividend got hiked another 15% in recent quarters, resulting in owners collecting more cash as they sell candy bars, pretzels, popcorn, and breath mints. The company is attractively priced right now at $191 per share, and would be an absolute steal at anything less than $135 per share. It receives essentially no press coverage. Few people talk about it on social media.

Look at Kenvue, the now-independent consumer staples group that was part of Johnson & Johnson for generations. The conglomerate owns Tylenol, Band-Aid, Neutrogena, Listerine, Aveeno, Ogx, and more. Nearly every person in the United States, and, indeed, a good part of the world, somehow, someway puts money into its coffers each year. The stock went from above $27 per share in May of 2023 to as low as $17.67 per share; a crash of roughly 35%. It bounced back a bit to $18.25, where it sits today. Meanwhile, the base dividend yield is 4.38% per annum equivalent, which is higher than the 10-year Treasury. Unlike the Treasury, there is a good chance, in my estimation, that Kenvue not only raises its dividend over time, but does so at a rate exceeding general inflation. It’s certainly not a company that will make a person affluent overnight, but it’s a brilliant holding for someone who is already wealthy and enjoys adding cash-rich money printing machines to their collection of enterprises. Again, no one seems to talk about it. Most people don’t even know what it is since the split-off and rebranding.

Consider Brown-Forman. One of the world’s leading distillers went from more than $80 per share in May of 2021 to $41.42 per share recently before bouncing back to $43.48 per share. This puts it within striking distance of a 50% collapse over a period of barely more than three years while the market itself has done quite well. A person can buy the stock for about the same price they would have paid a decade ago despite it being larger and more successful. To find anything even close to a parallel, you’d have to go back to the aftermath of the Great Recession and, before that, the dot-com bust. It typically does not happen to this family-controlled alcohol titan. Other distillery companies around the world are similarly down to varying degrees.

The list just goes on and on.
NIKE went from over $177.50 per share to as low as $71.24 per share. Starbucks went from almost $126 per share down to $71.55 per share. McCormick & Co. went from over $103 per share to barely over $60 per share. Clorox went from over $237 per share down to as low as $114.68 per share. Nestle went from more than $140 per USD equivalent to around $99 per USD equivalent. The Walt Disney Company went from just shy of $200 per share down to $78.73 per share. Many have modestly recovered but are still much closer to the lower end of the price range. If the major indices were not skewed to a handful of mega-capitalization technology companies that all seem correlated with one another, the media coverage of the stock market would be materially different.

On top of all of this, U.S. Treasurys are now such a phenomenal yielding instrument that I find myself purchasing them almost daily depending upon client-specific mandate, pumping out a 5%+ yield-to-maturity that is exempt from state income tax. It is difficult to overstate the hike in passive income this generated for our retired clients, in particular. (One tricky thing is that most online platforms report projected income based on coupon, not yield-to-maturity, so this means the actual passive income generated in a portfolio is often far higher than the projections would indicate as bond mature and are redeployed.)
Thus, I find myself in this sort of Goldilocks ideal world where account balances and wealth climb higher while, simultaneously, I am more and more willing to write large checks, so to speak, to add ownership of wonderful businesses at larger weightings to the asset book. It’s taken a lot of patience, but that is one thing I am particularly geared for given my personality and psychology profile. While I accept that any investment can experience total wipe-out – in life, it’s merely a matter of probabilities – I feel the totality of factors, on the whole, make it a pretty easy calculation to conclude that someone buying baskets of many of these companies today, at these prices, would probably be quite pleased to wake up in a decade even if things collapsed another 50% tomorrow. Provided, of course, they paid cash and did not use margin debt.
Don’t get me wrong, many companies have challenges they are facing at the moment. Target, for example, could be a wonderful business but it is not being managed anywhere nearly as well as it could be. Executives need to lower short-term profits and increase the number of people at the checkout line, improve the increasingly industrial feel of the stores that are looking more and more bargain basement rather than upscale suburban opulent (and thus appealed to its higher-than-average income, higher-than-average educated consumer for much of its history), and stop being so wishy-washy on cultural issues, managing to offend liberals, conservatives, and centrists, which is quite the achievement. Discount retailers like Dollar General, which have been amazing long-term compounders, are vocal about the pressure inflation has put on their shoppers, most of whom are considerably poorer than the typical American.
So, yeah … strange, strange times; to have so much of the population convinced stocks are getting far more expensive when, in reality, many wonderful companies are getting cheaper. It goes back to index construction methodology and “the market” being driven by a large concentration in a single industry. This is the reason it is so important to always think about your claim on individual cash flows of specific assets. That is, you can’t think of yourself as a stock market investor. Rather, you are an owner of individual productive assets that generate actual cash flows. Beyond that, the price and terms on which you acquire those cash flows determine much of the outcome. That’s the game. That’s the task.
Please note this is just a personal observation on a random Saturday as I sit at the kitchen table with the kids nearby coloring. None of this is meant to be individual investment advice as this is my personal blog and I’m talking in big, academic terms about forces I’m seeing in the world at the moment with an emphasis on enormous companies with deep trading liquidity. A given company or security may be appropriate or inappropriate for an individual depending upon age, risk tolerance, mandate, and numerous other factors beyond the scope of this conversation.