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A Good Value Is Getting Hard to Find

Don't start buying expensive stocks just because everyone else is


All objectives achieved, sir! A month ago, I predicted that the S&P 500 index would reach 1,440 by the end of 2012, “with 1,470 a target in January if Congress and President Obama can seal a bargain [on the fiscal cliff], however limited in scope.”

Well, the S&P cracked 1,440 on Dec. 18. The president signed the “limited” cliff legislation on Jan. 2. And yesterday, the S&P hurdled 1,470, closing a few pennies north of 1,472.

At this point, it would be tempting to declare victory, fold my tent and hop on the first Jeep home. But we’ve got 355 more days left in the New Year. A lot can, and will, happen in the financial markets between now and next Dec. 31.

So, without any further air punches, here’s what I see coming next.

Buying Just to Buy

The stock market right now is feeding on pure momentum. Folks are buying, not because they’re overwhelmed by all the wonderful values out there, but because the market indexes have been going up. Professional money managers, especially — the worst kind of crowd followers — are buying because they think their jobs depend on it.

Sure, a few good values can still be had. I myself was nibbling at Microsoft (NASDAQ:MSFT) yesterday, near the stock’s intraday low. At a mere 9x estimated fiscal 2013 earnings (ends June 30), the shares just look too cheap compared with Wall Street’s other merchandise.

The analyst at Morgan Stanley (NYSE:MS) who follows the software industry agrees with me: “MSFT is far too cheap, has multiple non-PC drivers and an attractive 3.5% yield,” he wrote yesterday. Yet the same gentleman downgraded the stock from buy to hold.

Go figure. It’s a bargain, I know it’s a bargain, I can prove it’s a bargain. But I won’t buy it. That’s how you draw a big salary, and get promoted, in today’s financial establishment.

Scarcity of Values in the Overall Market

Circling back to the overall market, however, I’ve got to admit I’m worried at the scarcity of values. As of yesterday’s close, the S&P 500 is trading above 17x the past four quarters’ earnings.

At the October 2007 major peak, the market P/E on trailing earnings stood at 18.4. We’re getting uncomfortably close to that level.

What’s more, actual reported corporate earnings (as opposed to analysts’ guesstimates) seem to have reached a plateau. S&P profits for the past four quarters amount to $86.50 per share, versus $86.98 a year ago.

I don’t like to think how the market might behave if earnings started falling in earnest. With a rich P/E built into current share prices, it could be a long ride down.

The Bottom Line

So, while it’s OK to do some light and judicious buying in here, you should also be looking to sell stocks and mutual funds that have exhausted most of their potential upside (for the next six to 12 months, anyway).

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk “value” approach has won seven “Best Financial Advisory” awards from the Newsletter and Electronic Publishers Foundation.

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