I am basing my contention that these in the six most expensive stocks in the Dow Jones, based on their operating earnings P E ratios you could see here the lowest P e ratio of this 1st 6 stocks is Exxon.

But I also want you to take note of price to cash Lou, because all these stocks pay a dividend and they're all reasonably high yielding, dividend paying stocks with the exception of Visa.

And I do want to point out, as I will here in a minute, that price to cash flow, maybe even more relevant to dividend payers than earnings.

So I'm going to look at each of these stocks in alphabetical order, by the way, starting with the Boeing Company, and I've got adjusted operating earnings up here and just to clarify things a little bit, I want you to notice that this Orange line plots earnings per share for Boeing. 00:00:59.990 --> 00:01:5.490 And the first thing you notice about Boeing is that from an earnings point of view, it's a reasonably cyclical company. 00:01:5.500 --> 00:01:6.950 Earnings rise and fall. 00:01:7.310 --> 00:01:14.090 Their dividend record has been quite good, As you can see by this white line here, which plots dividends has been steady.

Even during periods where earnings failed, the dividend continued to increase.

And then when I put monthly closing stock prices on the graph, I want you to notice that prices correlate very closely to the earnings or the Orange Line on the graph.

And more recently, Boeing has separated itself significantly, and I consider this to be significantly overvalued relative to earnings when I look at operating cash flow.

However, for Boeing, I see a slightly different picture.

Although similar to what we saw with earnings from an operating cash low point of view, Boeing looks more reasonably valued. 00:01:47.880 --> 00:02:1.930 However, the company's normal price to cash flow has only been about 10 over this long term historical view, So in this case it's the Blue Line which is plotting a normal price to cash flow of 10 and 1/2 that I think really illustrates evaluation. 00:02:1.930 --> 00:02:5.880 So in this basis, Boeing would also be moderately overvalued. 00:02:5.880 --> 00:02:15.770 And then, if you look at it from a standpoint of Ebola earnings before interest, taxes, depreciation, amortization, you will also see that the stock has got disconnected.

However, I do want you to notice that the forecast for Eva is actually pretty high.

They're normal price.

Even A is about 10 and they're currently trading at a 14 price to even now.

There's a couple other things I'd like to quickly point out about Boeing.

Obviously, it's an aerospace and defense company in his A rate and whoever it has 114% death capital.

So that's something that I think investors also should consider.

As I changed time frames here.

The growth rate because of cyclicality of this company is actually pretty high.

But I do want you to notice that the company does routinely have weaker earnings periods and then followed by usually very strong earnings.

I think we're entering one of the strong earnings period's coming up, so there we have bowing. 00:02:58.530 --> 00:03:4.080 I do consider it significantly overvalued in one of the more overvalued stocks in the Dow Jones. 00:03:4.480 --> 00:03:9.430 My next example is Caterpillar and Caterpillar is interesting for a couple of reasons. 00:03:9.430 --> 00:03:18.380 If I look at the long term history of Caterpillar once again, you see a company with a lot of cyclicality, and it looks really significantly different than Boeing.

However, you also see a consistent dividend record, and if I look at the performance results here, their dividends growth has averaged about 10% but more last year only grew by 2%.

And the dividend growth can be higher during periods when earnings growth really accelerated.

Now Caterpillar is moving into an up cycle relative to forecasts, and that probably explains why the stock has been on such a tear here.

And if I look at this from a standpoint of forecasting what the future might be when I look at the forecast in calculator, the P E ratio is equal to the growth rate forecast growth rate of 26.3%.

But when I look at caterpillars, normal price earnings multiple, you can see that the company has consistently been awarded somewhere between a 15 maybe in a 17 p e ratio, so I'll go ahead and pick a normal 17 p e ratio here And the point is, if you bought Caterpillar today, longer term, you might make a little bit of money.

But I do believe you face short term risk with the stock.

If it would go back to a more normal P E ratio, you could be looking at losses in the near term.

Although longer term Caterpillar may be fun with my next example, I'm gonna look at Chevron.

Of course, we all know what's been happening with the energy sector, and you could see Chevron has had a significant earning stress over the last 45 years.

As we've gone through this energy crisis, if you will, and I also want you to notice this white line area blow, this white line represents the dividend payout ratio.

Therefore, you will notice that in recent years the company's payout ratio has been significantly higher than its earnings growth.

It's payout ratio has been well over 100% over 400% last year, so the company's not covering its dividend with earnings, even though the company has continued to maintain a moderate rate of dividend growth over the last three few years.

While it's gone through this earning stress However, when you look at operating cash flow for this double rated company with only 17% debt, you will see that the company is covering its dividend with its operating cash lips.

However, once again, the blue line here becomes the better valuation reference, which is a normal price to cash flow of 7.8.

And these numbers usually, you know, I always think of these numbers are right.

This would be 7 to 8% perhaps or six and 1/2 toe, eight and 1/2 percent something like that.

So what this level Chevron would look moderately overvalued.

But the real key is whether or not these good operating cash phones we're going to increase, as the analysts are forecasting. 00:05:54.140 --> 00:06:7.150 My next Dow constituent is McDonald's corporation, and when you take price off here, I want you to see that McDonald's does have a much more consistent earnings growth rate or operating history than the other constituents I've just shown. 00:06:7.240 --> 00:06:15.230 Although they did have several years a weakness here, and they are forecast to begin growing at double digits for a least the next couple of years or so.

So if you look at what they expect for Kelly Dear 2017 which ends in about a month.

They're looking for a 14% growth rate, and we had a 15% growth rate last year.

But then they're looking for earnings to slow down.

But when I put price on this graph and extend this out a little further, you'll see that McDonald's stock price has generally tracked its earnings and during periods of overvaluation are times when the stock performs poorly.

Relative to you know, the near term future.

You see these periods of weakness, and right now this is one the highest valuations that McDonald's has traded at now.

You can also site by this graph that the market has been plying a slightly higher normal P E ratio.

But even on that basis, McDonald's look significantly overvalued. 00:06:59.850 --> 00:07:2.200 Their dividend record, however, has been exemplary. 00:07:2.200 --> 00:07:10.660 They've continued to increase their dividend, and I look at it from an operating cash flow point of view, their dividends extremely well covered, and I'm in this case.

I'm also gonna look at McDonald's free cash flow and point out that the dividend is also very well covered.

Relatives to free cash without was the company's generating more free cash flow than the dividend.

But I do want to point out that the company does have a lot of debt and his only triple B plus rated, which is investment Great.

But I consider McDonald's extremely overvalued at current levels, and the point being is that just by looking at this graph, it ought to become pretty obvious that there's not really a lot of room to make any money over the next 3 to 5 years in McDonald's simply because of this high valuation, the company's earnings growth rate, even if you look at it positively, which a long term forecast is 9.7%. 00:07:53.360 --> 00:08:5.100 If you look at normal valuations for McDonald's, you'd be looking at actually very low and even possibly going into negative rates of return over the next 3 to 5 year, especially over the next year or two. 00:08:5.100 --> 00:08:10.450 That's where I think the biggest risk is high evaluation is not a good time to be purchasing a stock.

My next constituent is Visa and probably the best of the group here.

From a standpoint of earnings growth, you could see their operating earnings growth record has been really exceptional in the company's stock price has tracked at earnings growth.

But notice what's happening to the P E ratios here.

In more recent years of normal, P E ratio has gotten very high, and even on that basis, Visa is moderately overvalued.

So I like these.

I'm actually for disclosure Long visa.

And I think Long term Visa will make money for investors.

So I'm not currently selling my visa forecast for long term report to grow by 17% a year.

I think that's very realistic, but I do want to go to the normal P E ratio here and look at how the market has typically capitalized this company.

So it has been a mid twenties p E.

But I'm gonna use a 25 p e ratio here as a kind of a medium or mean p e Rocha, and I want you to notice that at these rates, the rates have returned for Visa.

We're not really that enticing.

Even if the company trades of the 25 feet, this simply means there's no forecast for dividends here.

So I do expect Lisa to continue to grow their dividend going forward.

Finally, my last example is Exxon and Exxon looks very similar to what we saw with Chevron.

You have almost exactly the same economic history here.

The same cyclicality earnings have fallen, the earnings air covering the dividend a little better than what we saw with Exxon there double A plus rating, 10% debt.

And once again, when you look at operating cash Lois fart relative to them continuing to protect their dividend because with a 3.8% yield, that's really one of the most attractive aspects.

But the real key is, are these big multinational oil companies going to recover? 00:09:58.500 --> 00:10:3.770 And if they do, even at a normal 15 times operating cash flow? 00:10:3.770 --> 00:10:7.590 But I'll go to the normal operating cash flow number, which is around nine. 00:10:7.970 --> 00:10:15.950 You know, the rates of return would not be that high from a capital appreciation point of view, but on the other hand, dividend coverage looks adequate.

So these are the six when I considered to be most overvalued Dow stocks.

However, one thing I think that might come out of this, with the exception of maybe one or two stocks out of this group of six, the stocks were really not not overvalued relative to the future.

But the point is, the rates of return going forward are going to certainly be impacted by the high evaluations of the sixth.

Our constituents has been chucked horrible, saying Thanks for watching.

I hope you got something out of this.