The year 2016 is in the books, and the S&P 500 gained over 11% on the year. That’s great news if you’re already in the stock market … but it’s bad news if you’re looking to buy.
The market’s price-to-earnings (P/E) ratio is now 26.1, which is 17.6% higher than it was at the beginning of the year.
In other words, if you buy stocks now, you’re paying nearly a fifth more for those companies’ earnings than you would have nearly 12 months ago.
Stocks Getting Expensive
Making matters worse is the fact that the S&P 500 has soared over 8% in the last two months alone—accounting for much of the year’s total gains.
“Trump Bump” Reboots Stocks
Moments like these are every passive investor’s worst nightmare. The market has skyrocketed and it feels expensive to buy anything—but if you buy nothing, your cash will earn you a handsome return of 0.3% … if you’re lucky.
At times like these, we all need to be value investors.
Specifically, we need to find stocks that have missed out on the broader rally, but because they’ve been overlooked, not because they’re duds. This means avoiding companies like Bank of America Corp (BAC), which was a great buy a couple months ago, but now all the upside is already priced in:
BAC: The Check’s Already Been Cashed
Instead, we want stocks that have gone up less than the market year-to-date and with P/E ratios that are below the S&P 500 average.
Our shopping list should also include companies with strong financials, and especially a history of revenue — and dividend — growth.
You may be surprised to hear that there are a few such stocks are out there, even if they’re getting tougher to find.