Are you feeling like things are getting a little too
overheated?
Consider these two bits of information, both of which I
ran across on Monday:
Companies are hoarding lots of
cash. According to a
Wall Street Journalreport, companies are
holding more cashthan at any time in the past 40 years
-- an average of nearly 10% of assets at the 500 largest
non-financial U.S. companies.
Insiders are selling. According to one
estimate, stock sales by corporate insiders are currently
outpacing insider purchases by as much as 10 to 1, with
insiders at companies like
Nike (NYSE: NKE) and
Cree (Nasdaq: CREE) selling substantial
positions in recent weeks.
Now, there are lots of ways we can spin those two data
points, but the one that comes to my mind is this:
Knowledgeable people think that better investment
opportunities lie in the future.
Or put another way:
Opportunities are looking expensive right now.
Opportunities like the stock market, for instance.
Fully priced and then some
Economist Andrew Smithers recently opined, in an
interview with Bloomberg, that the S&P 500 was about 40%
above his estimate of fair value around 770 (as of late
October). Now, economists opine on all sorts of things all
the time, but as my fellow Fool Alex Dumortier
recently pointed out, Smithers is a guy to listen to --
his past calls on market value have often proven
prophetic.
Smithers said that the world's central banks and their
"quantitative easing" programs, which have essentially
flooded credit markets with cheap cash, have led to an asset
bubble -- the current stock market rally. As those programs
draw to a close, which they will eventually, Smithers
believes that the bubble will deflate, and the market will
flop down to something more like fair value.
Smithers isn't the only one saying that the market has
gotten well ahead of itself, and that things could turn once
the flood of cheap capital abates. Thoughtful market
commentators like
David Rosenbergand mere humble Fools like
yours trulyhave been skeptical of the foundations of this
run for a while now. With stocks like
Amazon.com (Nasdaq: AMZN) and
Starbucks (Nasdaq: SBUX) sporting trailing
price-to-earnings ratios of well over 50 despite subdued (at
best) growth expectations, clearly some things have gotten
out of whack.
But that doesn't mean
everythinghas gotten out of whack.
Uncovering value possibilities
If you know where to look, there are still
plenty of bargainsto be had. Let's be clear about this:
When I say "bargain," I'm looking for a great company selling
at a discount price. For starters, I want to see a
price-to-earnings ratio below 15 or so, and a
price-to-free-cash-flow ratio in the same range -- those are
two quick ways of looking at value. I also want to see a low
ratio of long-term debt to equity and a strong return on
equity -- two quick ways of looking at the company's health
and management.
I just spent a few minutes playing with a screener and
turned up these possibilities:
Stock
CAPS Rating
P/E
P/FCF
LT Debt/Equity
Return on Equity
Amgen (Nasdaq: AMGN)
****
10.9
11.3
0.49
21.7%
Pharmaceutical Product
Development (Nasdaq: PPDI) Continued... |