PEG Values in Health and Tech

12/09/2013 9:00 am EST

Focus: STOCKS

Stephen Quickel

Editor, US Investment Report

Holiday gift buying is just getting underway; but in the stock market, eager buying has been underway for the entire year—despite a less than robust economy and the certainty that the Fed will shortly start removing the monetary props that have kept stocks rising, cautions Stephen Quickel in US Investment Report.

So why does the buying continue? Has rational investing declined in direct proportion to rising price/earnings ratios? Everyone knows the market is over-extended, but no one is bailing out—not yet anyway.

Investors with big paper gains in the year-long upsurge are reluctant to cash in, because they don't want to miss out on more gains.

Timid folks who missed out on those gains, because they didn't trust the sluggish economy and the Fed actions that artificially inflated corporate profits and share prices, are belatedly buying overpriced stocks in an attempt to play catch-up.

Market professionals, with wads of other people's money at their command, know that stocks are over-extended, but could care less as long as the averages keep hitting new highs. They are busy padding their fees and year-end bonuses while the party lasts.

Such bearish talk may sound odd, as our model portfolios have been fully invested. Yet, it is not necessarily bearish to suggest taking profits and avoiding aggressive buying in this kind of weak-economy, Fed-fed stock market.

It makes strategic sense. It's downright foolish to grasp at overvalued stocks in an attempt to make a belated killing before the market corrects.

Just remember that institutions operate like a herd. Once they are spooked and start charging for the exits, it will be hard not to get trampled if you own questionable stocks with no stop-loss protection.

Meanwhile, we continue to find stocks that are capable of generating 17%-plus earnings growth and sell at PEGs within the ideal range of 0.90 to 1.10.

For example, we find several of these high-growth/moderate-PEG stocks in the healthcare sector, including Actavis (ACT), Gilead Sciences (GILD), Jazz Pharmaceutical (JAZZ), and Valeant Pharmaceuticals (VRX).

Our technology stocks are generally high-priced. However, three trade at PEGS in the 0.71 to 0.88 range and offer high-teens earnings growth rates—namely Apple (AAPL), Sandisk (SNDK) and Qualcomm (QCOM).

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