Think the bull is finally back?
I'm skeptical. We may be up, but I'm not so sure we're
going to stay up. Consider:
around 19 timescyclically adjusted earnings. That's
somewhat high; the long-term average is a bit over 16.
Given the economic fundamentals, a sharp pullback may be in
order -- soon.
On the one hand, we hear a lot about how the worst is
behind us. And that might well be so. On the other hand,
there's still weakness out there, some stocks are sporting
seriously unreasonable valuations, and to my eye things are
looking ripe for a correction.
But if you've got money to invest, I think it's still a
good time to buy -- if you know where to look.
The bargain bin is still well-stocked
Here's the thing about this rally: A lot of solid
companies haven't really been part of it. Of course, that's
true of most rallies -- a bedrock principle of value
investing is that there are nearly always bargain-priced good
companies to be found in out-of-favor sectors. If you can
find those, and buy 'em cheap, you'll be well-positioned for
gains over the longer haul.
Of course, "bargain" is often a relative term, but what I
mean is companies that are selling for a low price relative
to their earnings.
Goodcompanies, ones that are generating a high
return on their capital, have a good chance of sustaining
that return, and have low debt loads.
Put another way, we want great stocks with a
margin of safety, the term we use when a company's share
price is lower than the company's
intrinsic valueper share.
But what if they're cheap for a reason?
Well, it depends on the reason. If a stock is cheap
because its big-idea founder just got indicted for something
awful and the business is reeling, that's not a good sign.
But if it's cheap because it's in the oil and gas business
and people are unsure of the short-term direction of energy
prices, that's not necessarily a bad thing. In fact, it might
be a good thing for us.
But that's why we emphasize the margin of safety. Of
course, intrinsic value calculations are just educated
guesses, even more so while the economic outlook remains
uncertain. But if we know what to look for, and we put some
time into understanding the company and its industry, we can
skew the odds of success in our favor.
Some examples to check out
Where do we find them? I always start with screeners,
like the
excellent (and free) screenerthat's part of
Motley Fool CAPS. Using the CAPS screener and a few
others, I recently turned up this list of possibilities:
Stock
CAPS rating
(out of 5)
Price/Earnings
Long-Term
Debt/Equity
Return on Equity
Chicago Bridge
& Iron (NYSE: CBI)
****
10.5
0.17
26.5%
Fluor (NYSE: FLR)
*****
12.4
0.01
26.7%
Foster Wheeler (Nasdaq: FWLT)
*****
10.1
0.31
55.2%
General Dynamics (NYSE: GD)
****
10.2 Continued... |