Stock Valuations at Rock Bottom

11/11/2011 12:00 pm EST

Focus: STOCKS

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Emerging Growth’s Louis Navellier discusses his outlook for the stock market as we head into the end of the year, and points out the reasons you should be invested in stocks, in this exclusive interview with MoneyShow.com.

Louis, we’re in the third of a presidential cycle, which is generally supposed to be very bullish for stocks. It hasn’t turned out to be so far…and we’re also coming into the sweet spot, the best-performing six months of the market. Is this the year that’s going to break all of those rules?

No, I think we’ll have a standard year-end rally. You know, our growth-to-P/E ratios are below where they were when Jimmy Carter was president, and they called that a crisis of confidence. You can’t beat up the market much more.

The S&P now yields more than the ten-year Treasury. Earnings are supposed to be up 13.3% in the third quarter, sales are supposed to be up 10.6%. So if there’s just no P/E compression anymore, the market at the end of the year should rise at least 13.3%. I think we’ll get some P/E expansion, personally.

We’ll also hit the happy time of year. It’s hard to explain, but over in the UK when they had the wedding, our average British stock was up 12.42%, our average Bermuda stock was up 5.82%, and the only Indian stock we had was up 27.47%. So it’s like Britain and her colonies were celebrating the royal wedding.

We get in a very good mood around Thanksgiving. Whether it’s friends, family, football, food—who knows, OK? But the holidays are a happy time, and it seems to run off in the market. The year-end pension funding helps.

So I definitely think that it will finish with a flurry. There’s nowhere to go. And you’re talking to a guy that sells $1 billion a year in bonds, and I’m a stock guy and I know people are wanting income. But you can get better income with the stock market, especially after taxes.

But you’re in the camp that’s says right now, stocks are pretty cheap, undervalued.

They’re rock bottom. I mean, just to be dead serious, Edward Yardeni, who’s probably one of my favorite columnists, pointed out that if we did things on dividend-discount models, we should be trading at 51.4 times earnings. We’re at 11.3—and ten times forecast earnings (this is the S&P).

So the stock market is totally out of sync relative to the bottom of the market, and I think there’s no reality left. And I don’t think that most people know that the S&P is at a record level for earnings. I don’t think people know about our record P/E ratios or growth ratios now…I mean, that’s ridiculous.

I don’t think people know that their earnings are going to be going up for the next six quarters—and a lot of our growth has nothing to do with the United States, it has to do with the rest of the world, but it’s picking up here too.

We’ve got retail sales picking up. We’ve got better trade numbers. We just have to cheer up. You can’t be depressed forever, so it’s time to cheer up.

Well, the sectors that are the most downtrod now, do you expect them to recover towards the end of the year? I’m talking the industrials, the energy, and of course, the financials.

I don’t buy financials, because I’m an ex-bank analyst and the experience scarred me for life, OK? No, I don’t expect the financials to recover.

I mean, we have the European financial problem, which is a sovereign debt problem. But over here in the United States, it’s pretty simple what’s going on.

I have a home; I go between Florida, Reno, and Nevada. But in Reno, it’s perfectly normal for good creditors to stop paying on their home. You might think, why would they do that?

Well, because they get a better deal when they stop paying. The bank will call you in a few months and they’ll work out deals at 2%. So all of those people with 4% and 5% mortgages have started to figure that out, and they’re defaulting en masse.

You have initial foreclosure notices in California up about 55% in August. Nationally, it went up 33%. And it’s mass anarchy now. The banks have a lot of problems in the pipeline.

So stay away from those?

Well, yeah, I don’t want to own the banks. I know some of them reported record earnings, because of writedowns—we’ve got a new wave coming….I just don’t want to be there.

And even Operation Twist, with the Fed doing this flattened yield curve, it’s starting to squeeze some of their profits too. It just depends on the bank.

But I benefit from that, because money then flees value investing—which is overpowered by financials—and goes to growth investing, so it’s bad for banks and good for me. And the truth of the matter, banks get hit 5%, that’s OK.

If they get hit 20%, they will throw the baby out with the bathwater, but we already had that in the third quarter. So we’re in the aftermath of that, and I think it’s going to be wonderful.

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