From the perspective of last spring, this is a stock market that looks very expensive. From early March to the recent peak in mid-October 2009, the Standard & Poor's 500-stock index blasted 65% higher, before beating a small retreat in late October.
The big rally of 2009 has made it difficult to find stocks trading at cheap valuations. "Trying to find undervalued stocks in this kind of market is fraught with danger," warns Beth Larson, portfolio manager at Evermay Wealth Management. Much of the easy money has already been made, she says. "By this point, you have to be very careful what you're picking."
But that doesn't mean there aren't stocks with potential. Mark Travis, chief executive of Intrepid Capital Management, says many stocks in early 2009 seemed to be trading at 50% of their intrinsic value. Now, it's more common to find good buys at 80% or 85% of their real worth, he says. That still allows for a significant gain—more than the nonexistent returns these days on bank savings accounts or money market funds. But, he says, "it's definitely harder than it was in late February."
Many in February and March were predicting the worst for the economy and financial system, and panicked investors pushed stock values to dirt-cheap levels. Especially hard-hit were equities seen as risky—companies pummeled by the recession or loaded up with too much debt. Having apparently survived their brush with death, many of these companies saw their share prices double, triple, or quadruple. "This a rally that has been led by the risky stuff," says John Buckingham, chief investment officer at Al Frank Asset Management.
The rally has been very generous to some sectors while it bypassed other areas of the market. For example, according to Standard & Poor's, the technology sector is up 48% in 2009, and the consumer discretionary sector has jumped 35%. By contrast, the telecommunication sector has languished, down 7% this year, while utilities have gained less than 3%.
Thus, there are wide swaths of the market that have been left behind by the broader market rally. That could be an opportunity for investors looking for stocks set to move higher, Buckingham says. "Investors should be gravitating toward the names that really haven't had a great performance in the [market] recovery," he says.
If you're putting new money to work in this market, he advises starting with large, dividend-paying companies with a reputation for safety. He is buying Wal-Mart (WMT), Verizon (VZ), Lockheed Martin (LMT), and Abbott Laboratories (ABT).
Post a comment about this story in Reader Discussion…
Track and share business topics across the Web.
RSS Feed: Most Read Stories
RSS Feed: Most E-mailed Stories
RSS Feed: Most Discussed Stories
About Advertising EDGE Programs Reprints McGraw Hill Careers Terms of Use Disclaimer Privacy Notice Ethics Code Contact Us Site Map Press Room
Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.
McGraw-Hill Education Standard & Poor's BusinessWeek Platts McGraw-Hill Construction AviationWeek McGraw-Hill Broadcasting J.D. Power
Read Full Article »