Monday, September 26, 2011

Value Opportunities in Stocks

I reiterate that now is a good opportunity to shift from cash reserves to stocks (assuming that cash is currently a substantial portion of overall assets).  In short, stocks are likely to have at least a recovery bounce from an oversold condition; market sentiment measures reflect extraordinary pessimism; and, the valuations of many leading companies are reasonable.

But for those who are unwilling to make a significant net shift into equities, I suggest taking advantage of situations where some stocks in a sector have substantially outperformed similar companies in the same sector.  Such situations provide opportunities to sell the large gainers and reinvest in the laggards.

There are numerous examples.  Take, for instance, Avon Products (AVP) and Colgate (CL), two internationally-focused consumer companies.  So far this year, CL stock is up 13%, has a p/e on 2011 earnings of 18, and a forecast long-term earnings growth rate of 9%.  AVP, however, has a ytd return of -31%, a p/e of 10, and a 12% growth rate.

Similarly, Costco (COST) has a ytd return of 16%, a p/e of 27, and a 13% growth rate.  Target, on the other hand, has a ytd return of -16%, a p/e of 12, and a 12% growth rate.

Those are just two examples within sectors.  Going outside of the same sectors, I'd suggest rotating out of big winners this year and into laggards of high-quality companies.  As I noted recently, electric utilities, for example, generally hold little appeal at current prices, even for income-oriented investors.

Some leading companies whose stocks have become quite depressed are Emerson Electric (EMR), which has a ytd return of -24%; FedEx (FDX), -25% ytd; and Schlumberger (SLB), -25% ytd.  The first two companies are somewhat more sensitive to global economic output, but the below-average valuations relative to long-term prospects reflect that, in my view.  I'll repeat it again.  Always keep some cash reserves for unanticipated buying opportunities.  But if your portfolio allocation to stocks is currently below your long-term target allocation, now is a good time to add to them.

Steve Lehman

S & P 500:  1163

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