McKesson Corporation (MCK): Resist Stocks With No Margin of Safety

However, the stock price has rallied so much that the stock no longer offers a compelling yield. McCormick & Company, Incorporated (NYSE:MKC) yields just 1.8%, less than the approximately 2% yield available on the S&P 500 Index.

Moreover, the company trades for 24 times trailing earnings, a lofty valuation when you consider that its recent operating results left a lot to be desired. McCormick & Company, Incorporated (NYSE:MKC) reported 8% growth in 2012 net sales and earnings per share. That was followed up by just 3% growth in net sales and earnings per share in the first quarter, year-over-year.

The Foolish bottom line

Paying too high a price for a company’s earnings is one of the surest ways to under-perform the market over time. Value investors understand the merits of purchasing stocks trading at attractive enough prices that they offer shareholders a meaningful margin of safety through downside protection and dividend income. This means that when the next downturn arises, such a stock won’t get crushed as badly. While it might not seem like a useful endeavor today, it pays off when the market goes down—and rest assured, there will be another market downturn sooner or later.

Investors who would like to buy these stocks would do themselves a service by exercising patience here. These are high-quality, profitable businesses, but it needs to be said that the stocks trade for uncomfortably high valuations and offer little in the form of dividend yield cushions. Buying opportunities generally present themselves sooner or later, and if you’re interested in these stocks, wait for a better price before pulling the trigger.

The article Resist Stocks With No Margin of Safety originally appeared on Fool.com and is written by Robert Ciura.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends McCormick and McKesson. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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