Our daily breakout stock ideas are most suitable for aggressive investors seeking ideal entry points...
Climbing the Wall of Worry
07/16/2014 9:00 am EST
Once upon a time, during the darkest of days in the US equity markets, we saw a light at the end of the tunnel; at the time, we forecast that 2009 would be a year for bargain buyers and might represent the best buying opportunity in decades for depressed high growth small-caps, recalls Ken Farsalas in The Oberweis Report.
More than five years later, US markets are at record highs, led by small-cap stocks. Certainly stocks are not cheap anymore, and certainly stocks no longer offer “the best buying opportunity in decades” as we opined then.
There is a growing chorus of pundits who are adamant that stocks are ridiculously overvalued. Never before have we seen so many who are willing to call the top in equity markets.
While stocks are up and valuations are nowhere near as enticing as they were in 2009, we would argue that calls of bubbles and crashes are borderline irresponsible.
While the S&P 500 P/E is above average, our universe P/E is still at below-average levels, and well off the peak P/E of 27.9 times witnessed in early 2004. On an absolute basis, stock valuations are far from outlandish.
On a relative basis, one might argue that they are actually downright compelling. Relative valuations are pertinent because investors in general are looking for a return on their capital; rarely will they be content with stuffing cash under the mattress.
So, if not stocks, then what? The most logical alternative is bonds, and as we’ve argued for quite some time now, we believe the 10-year US Treasury Bond yield of 2.5% is unattractive.
Yes, equity P/E’s are creeping toward levels seen in 2006-2007, but remember that the 10-year yield during that time period ranged from 4.4% to 5.3%. The alternative to equities back then was far more compelling than it is today.
Another relative approach is to compare the dividend yield on the S&P 500 with the 10-year yield. While the current dividend yield of 1.6% is lower than the 10-year yield, the dividend yield/10-year yield ratio is still more favorable than the ratio witnessed during the 2004 to 2007 time period.
The old Wall Street adage is that “bull markets climb a wall of worry.” Our belief is that the secular bull market remains intact and will continue for some time. As we’ve mentioned in the past, however, corrections of 10%-20% are common during secular bull markets.
While we believe it’s futile to try and predict such events, we would embrace any substantive weakness (and, as we say in the office, buy ‘em with both hands and both feet). The light is still at the end of the tunnel.
More from MoneyShow.com:
Related Articles on STOCKS
I understand, my views are not outside the mainstream, but long-term investors should buy Apple shar...
Next week has a couple significant concerns: one of course is the FOMC meeting, generally discounted...
On Monday, after a reshuffling of $2.8 trillion of market cap across three sectors, brand-new sector...