Get Ready for a Better Market

07/14/2006 12:00 am EST


Richard Band

Editor, Profitable Investing

Richard Band, the value investor's steady guide, is editor of Profitable Investing, which covers the waterfront from stocks, bonds, and mutual funds to insurance, taxes, and college and retirement planning. Here he advises his subscribers that the best is yet to come…


“We’re headed into the sweet spot of the market cycle. The S&P 500 since 1945 has returned an average of 42% in the last two years of a President’s term. What’s more, if you measure from the market low of the mid-term year to the high of the Presidential election year, the gains are even greater.


“For the cherry on the cake, the stocks in the S&P today are trading at their lowest price-earnings ratio (based in trailing 12 months’ operating profits) in the past ten years. With the market this cheap, all it would take to trigger a massive rally would be some hint that the Fed has finished tightening. (Ed’s note: We might have received this hint at the last Fed meeting, 6/29/06). Then we’ll be off and running toward Dow 16,000 by Election Day 2008.


“There are times to be cautious in the market, and times to be aggressive. Given that we’ll soon be entering the most favorable stage of the market cycle, I advise you to lean more to the aggressive side.


“Without taking on foolish risks, I suggest that you focus your buying on stocks and sectors that have gotten noticeably roughed up during the recent downturn. Energy is certainly one area. Conoco Phillips (COP NYSE) looks astoundingly cheap at a mere 6X this year’s estimated net. This stock is trading as if oil were at $40 a barrel, not close to $70. Buy COP at $62 or less.


“For income investors, I’m also keen on Chevron (CVS NYSE), a “standby” member of our Incredible Dividend Machine. CVX is changing hands at less than 9X estimated earnings and yields a juicy 3.3%. Buy CVX at $60 or less.


“For a sportier play on energy, you might consider one of the “pure” natural gas stocks. Even though it’s the cleaner-burning fuel, natural gas these days is quoted at a steep discount of nearly 30% to crude oil (in terms of equivalent heating value). I’m a big fan of one of the midsized players in gas, Chesapeake Energy (CHK NYSE). CEO Aubrey McClendon constantly buys multimillion-dollar blocks of the stock whenever it takes a sizable dip. Follow his lead and buy CHK at $30 or less.”

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