Friday, May 18, 2007

10 Thoughts after Looking at 2,000 Stocks

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:
  1. US big cap stocks are about 8-10% undervalued.
  2. Europe is pushing close to fair values in a number of countries.
  3. 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.
  4. The most overvalued sectors worldwide are the Utilities, REITs and Basic Materials.
  5. The most undervalued are the consumer staples, and to a lessor extent the health-care stocks.
  6. The banks are still cheap in almost every country I looked at, especially in the US.
  7. 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.
  8. 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.
  9. Energy stocks are high and going higher. The global economy is showing no signs of slowing and ethanol's limitations are coming into view.
  10. 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.
  11. When US retail stocks begin to participate, this phase of the bull run will enter a period of consolidation.