CHICAGO, Aug. 24, 2011 /PRNewswire/ -- Zacks.com announces
the list of stocks featured in the Analyst Blog. Every day the
Zacks Equity Research analysts discuss the latest news and events
impacting stocks and the financial markets. Stocks recently
featured in the blog include: Cummins (NYSE: CMI),
National Oilwell Varco (NYSE: NOV) Suncor (NYSE: SU)
Southern Copper (NYSE: SCCO) and CVR Energy (NYSE:
CVI).
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Here are highlights from Tuesday's Analyst Blog:
Smithereens Scenario
Yesterday, I wrote "Just 2 Scenarios: Recession or Not" to
highlight that since the market had already priced-in much slower
growth, verging on a mild recession, and since we still don't know
for sure if we are going to have one at all, it doesn't make sense
to sell all your stocks based on any "sky is falling" scenario.
Today, I bring you that third alternative, with a twist. My
title is tongue-in-cheek, a twist on the name of one very bearish
economist named Andrew Smithers.
But since his research may carry some weight with other
quantitative fund managers, I think it's at least worth seeing what
he has to say.
Get Out While You Can
That's the gist of his message right now as he sees a
"significant rally" on the horizon as companies rich in cash buy
back shares. Smithers says this will be a rebound to sell as US
equities are still 40% overvalued even after the current 15%+
correction.
Anna Kitanaka, in a story on
Bloomberg.com Monday, writes, "Smithers said in a report dated
Aug. 15 that the S&P 500 is still
overvalued by about 43 percent relative to earnings for the past 10
years... Relative to the Q ratio, a comparison of market value with
the replacement cost of assets, the index is about 36 percent too
high."
I couldn't find that report publicly available so I will just
summarize and quote from Kitananka's excellent article. For details
on the valuation model, Equity Q, that Smithers uses, see his
investment management website at Smithers & Co. where he has a
detailed FAQ on "q" as he calls it.
Don't Be Fooled
Smithers explains that just because corporations have lots of
cash doesn't equal economic expansion. Cash continues to accumulate
to record levels because profit margins are so high. But as
Kitananka summarizes his views, such wider profit "margins imply
companies are either paying their employees too little, employing
too few people or keeping their prices too high, all of which damp
demand."
This is precisely the new economic landscape that become
stunningly apparent after the GDP revisions of July 29. First, we finally had confirmation that
stubbornly high unemployment was very precipitous of the actual
growth numbers.
Second, we were forced to take a good hard look at where a big
chunk of US corporate profits were coming from (abroad) since
domestic demand was barely on the radar.
"How would the S&P 500 stay on pace to earn nearly
$100 per share this year if
China really slowed down?" was the
question I started asking on August
1. Here's how Smithers saw the investor's predicament a few
weeks ago...
"It is common to find that investors, often supported by
ill-judged comments by investment bankers and financial
journalists, try to value shares on the basis of current profits,"
he wrote. "This is, of course, very foolish as it means that they
undervalue companies when profits are low and overvalue them when
profits are high -- as they are today."
A Multi-Decade Bear Market
Smithers worked at S.G. Warburg for 27 years before starting his
own investment firm and achieved some notoriety after calling
stocks overvalued in his March 2000
book Valuing Wall Street.
In October 2009, as the S&P
rallied to nearly touch the 1,100 level for the first time in a
year, he said stocks were 40% overvalued. Listening to this bear
then would have hurt.
But he has a very long term perspective in mind when he talks
about the market. From Kitanaka's article, Smithers is quoted, "The
U.S. market was more overvalued in 2000 than ever before. It has
yet to become undervalued and will naturally do so at some
stage. The bear market which started in 2000 is likely to be a
long one."
Those are my italics on "has yet to become undervalued." Boy, if
he didn't think stocks were cheap when the Dow was below 7,000 and
the S&P below 700 in 2009, this guy is hard to please!
The reality is that he is die-hard in his economic analysis and
has a really big big-picture perspective that might help some
people get really rich -- eventually.
But it should be painfully obvious, to even the most die-hard
Elliot Wave Super Cycle theorist that you can make a lot of money
trading the gigantic swings within such decade-long sideways
markets, which are always full of smaller bull and bear cycles.
It really comes down to your investing and trading time frames.
Are you going to let deep and persistent "structural" problems
prevent you from catching cyclical trends, swings, and counter
moves? Of course you aren't.
What If the Bear is Real, and Really Nasty?
So, should we listen to Smithers now at all? I think we can
still "wait and see" as I've been saying for 3 weeks now that fund
managers would be doing. Take long positions on good stocks that
still have earnings momentum and enjoy that 10% rally that he says
is coming until we know more about a potential recession.
My line in the sand that tells me the recession is about to
become real is the 1,100 level on the S&P 500. You will
obviously have time to sell because we are not crashing through
there yet.
My perspective, as I wrote about all through 2009 and 2010 in my
column "Buy and Trade" as a market analyst for PEAK6, is that you
can put the odds in your favor to trade 1-3 months swings in good
stocks much better than you can time the overall market.
Not all earnings are going down the tubes and the Zacks Rank
will keep you on the right side of things because as analyst
estimates come down, those companies with visible and sustainable
profits will stand out. And these are the stocks that will beat the
market.
Here's how I summed it up last week in A Trader's Market for the
Next 2 Months when I was selling puts and swing trading
Cummins (NYSE: CMI), National Oilwell Varco (NYSE:
NOV), Suncor (NYSE: SU), Southern Copper (NYSE:
SCCO), and CVR Energy (NYSE: CVI)...
You have a couple of things in your favor that create a
high-probability opportunity to profit.
If there's a stock you wanted to buy last month and now it's
trading 20% to 40% below that level, ask yourself "What does my
risk/reward look like now?"
Ignoring for a moment the probability of recession that could
take it even lower -- which is what this market sell-off is all
about -- if you buy the stock "on sale" you put yourself in the
investment position you wanted with a new margin of safety.
Then, if you get a 10% to 20% pop in a few days, you have the
luxury of choosing that short-term trading gain or keeping the
investment.
When you get these terrific volatility-driven returns in a
matter of days, there is no harm in taking them. Especially since
chances are we haven't seen the final bottom yet in this panic and
you will get new opportunities to re-enter.
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