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Stocks Haven't Been This Cheap in Over 20 Years

Stock-Markets / Stock Market Valuations Jul 16, 2010 - 07:30 AM GMT

By: DailyWealth

Stock-Markets

Best Financial Markets Analysis ArticleChris Mayer writes: I have friends and family invested in the ideas I write about in my advisories.

So, when I see someone, the conversation usually turns to stocks. You know how most people comment on the weather in some way early in a conversation. With me, it's the market people want to talk about first.


With the recent market swoon, I've had some folks ask if they should even be in stocks at all. Some 42% of individual investors are bearish and only 25% are bullish, according to a recent American Association of Individual Investors poll.

Newspapers and the like often cite this poll. It's a useful contrarian indicator. When people are bullish, look out. When people are bearish, then perhaps it's a good time to think about buying. Right now, the poll says you should look to buy.

I think most investors are fearful because they focus on the drumbeat of bad economic news. There is a lot of angst over the latest employment numbers, or the manufacturing index, or whatever.

But here is the thing: None of this really has much to do with investing. A lousy economy can be a great place to invest. And an economy in great health can be a terrible place to invest. It all depends on prices. All the noshing on economic data doesn't mean much without some context. You need to know what you get for what you pay.

On that front, things don't look so bad. As Barron's reports, "The forward P/E on the S&P Index is below 12, the lowest since the late 1980s." Unless profits collapse, the market overall does not look expensive. Many of the big stocks in the S&P 500 trade for 10-12 times their 2010 earnings estimate.

Some of them are cheaper than they appear because they have so much cash. Companies like Microsoft and Cisco have $4 per share (about 20% of their market caps) in net cash. If you net out the extra cash, the price-to-earnings ratios fall even further.

Keep in mind, profits have already collapsed. So while profits are growing now, they are still way below pre-recession levels. We're working off a low base.

Beyond this, I think a lot of how you feel about investing comes down to time horizon. I feel pretty good about recommending the stocks in my advisories right now. There are plenty of great opportunities out there if you dig around for them. But I don't know if they'll work in the next three months. I think long term.

I'll quote value investor Clement Fitzpatrick (in Barron's), who gets it exactly right when he says, "It all depends on one's time horizon. Investors who look six months into the future don't behave the same as those who look five years into the future. They come to radically different conclusions."

The market is extremely short-term focused. So you can get an edge if you think out even a year from now.

But let me be clear about something: I don't think the U.S. economy is in good shape. I am most discouraged when I consider the bloated and out-of-control federal and state governments. They spend too much. They are in too much debt. They are far too powerful. And I think it is fair to say that the current administration is hostile to business. I think the U.S. dollar is a sick currency.

This is why I've been investing in overseas themes and ideas. There is a lot of exciting activity in pockets around the world. There is, for instance, a growing new pool of consumers, particularly in Asia, but also Latin America and other developing countries.

There are great opportunities, too, in necessities and scarcity – in things like food and energy and water. I like resource companies – loaded with such things as uranium or potash – and their ability to create wealth.

All this is to say I am not discouraged by the stiff correction from the April highs. I'm still recommending stocks. It's not a popular idea right now… which why I'm confident it's a good one.

Regards,

Chris Mayer

Editor's note: Chris Mayer is the editor of Capital & Crisis, a monthly advisory we consider required reading at DailyWealth. With Chris' research, you can always count on contrarian investment ideas you won't read about anywhere else.

Click here to learn more about Capital & Crisis and Chris' "personal bailout plan," which shows you how to rescue your retirement with up to 48 personal "bailout" checks paid direct to your account over the next 24 months.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2010 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

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