When you're dealing with blue-chip companies – those heavily traded and highly sought after industry titans – price becomes an important component to any investment decision.
Unlike smaller growth stocks, which can grow sufficiently over the long term to mask many pricing sins, many blue-chips have a more limited growth outlook and paying the wrong price can make it difficult to beat the market by owning these stocks.
Two blue chips that I do not feel are a buy right now are Macquarie Group Ltd (ASX: MQG) and Sonic Healthcare Limited (ASX: SHL).
Macquarie Group trades on a Price to Earnings (P/E) ratio of around 16, which is higher than the global average of banks and seems fairly cheap given the performance of the business in recent years.
Just ten days ago, Macquarie upgraded its guidance to forecast a further 40% increase in profit for the first half of 2016, as well as a 19% increase in full-year profit. As I have written before, Macquarie is unlikely to require any additional capital to fulfil its regulatory requirements, and I certainly believe it is one of the best positioned banks in Australia.
However, a substantial portion of its business is dependent on the performance of the stock market, and I feel the company is vulnerable to adverse market events. We're in the middle of one of the longest bull markets in history, and, statistically speaking, the likelihood that a bear market (where the market falls more than 20%) is imminent increases over time.
Macquarie is a great business, and if I owned it I would continue to hold it. That said, I do not feel it is a market-beating buy at today's prices.
It's a similar story with Sonic Healthcare, which trades on a P/E of around 21. Unlike Macquarie, it's not posting the growth to justify its valuation, with earnings per share growing by mid-single digits last year and forecast to produce a similar performance again this year.
Sonic has a sound track record of acquisitions and the company possesses a decent moat as a result of its wide, global footprint and accumulated expertise. However, as the recent loss of a contract in Canada shows, the business is vulnerable to political changes to the healthcare system – perhaps more so in the near future as government budgets remain under threat.
I have written previously of the potential for healthcare system reform to impact stocks like Sonic Healthcare and Medibank Private Ltd (ASX: MPL), and that risk remains.
Combine all of these factors and I do not believe that Sonic is a market-beating buy at today's prices, although it remains a fantastic business.
