Stocks in the US and around the world have made a series of new highs over the last three months, which has prompted a chorus of boo birds to start chanting that the market has come too far too fast. They are just as wrong now as they were when they said that the Dow could not get through 11,000 last year.
I spent two days this week running almost every big stock in the US and Europe through our dividend and earnings models. This is what I see:
- US big cap stocks are about 8-10% undervalued.
- Europe is pushing close to fair values in a number of countries.
- There are lots of formerly dead cats bouncing all over the world. This is not a bad thing, it is in recognition of the growing global economy and the consolidation in many industries.
- The most overvalued sectors worldwide are the Utilities, REITs and Basic Materials.
- The most undervalued are the consumer staples, and to a lessor extent the health-care stocks.
- The banks are still cheap in almost every country I looked at, especially in the US.
- Telecommunications, except in rare cases, are running on something other than value. They are the new Tech stocks. The old Tech stocks are, well, old.
- The Industrials are the most surprising sector in the US and abroad. These stocks have had good moves, but are as much as 15-20% undervalued in our models. Their gains and those to come, again, are the result of the explosive growth in the developing nations.
- Energy stocks are high and going higher. The global economy is showing no signs of slowing and ethanol's limitations are coming into view.
- The keys to a continuation in the bull market are the staples and banks. They represent 35% of the market cap of the S&P 500 and are underperforming. I believe they will catch their wind as we move through the summer and the slowing economy causes the boo birds to start chanting recession.
- When US retail stocks begin to participate, this phase of the bull run will enter a period of consolidation.
Blessing,
4 comments:
Thanks for the analysis. In what countries did you find the bank stocks to be expensive? I'm writing from Canada, but hold US and International banks.
When "Dead Cats" bounce, it only reinforces the knowledge that the Heisenberg Uncertainty Priciple is alive and well. Remember the cat in the safe and the question "is it dead or alive?". The answer is it is both or at least a superimpostion of both states.
The Heisenberg Priciple states that you can either know the velocity of the electron or the location in space but you can not know both with extrem precision. The beter you know one variable the less well you know the other.
The market behaves the same way. You may know the valuation but you can't precisely know the momentun and if you know the momentum you will never precisely know the valuation. Thus the Boo Birds, being quantum beings intuitively understand the quantum underpinnings of life and become nervous when valuations make momentum indecipherable.
The dead cats that are bouncing are really few and far between. ATT, VZ, GM in the Dow are all up near 40% in the last year. Only a handful of the remaining stocks in the Dow are overvalued.
I think the fact that there are so many people worried about the level of the stock market is a good thing. That means there is a lot more new money that will come into the market when they capitualate.
Which consumer staple stocks look most attractive in your analysis?
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