The Market is ‘Cheap’

I was going to write about a slightly different topic today because I find it to be a real eye-opener: the “value” of the market.

First, I know everyone is debating if we’re in a recession or not. No need to debate; I have the answer: We’re not. We’re in a short-term economic slowdown, and the economy is still growing. With the dramatic interest-rate cuts (and perhaps more to come), the stimulus checks, ordinary tax refunds and tax breaks for business, most economists believe the economy will be looking good in the second half.

Secondly, people are now talking about stagflation. The discussion is not necessary. We’re not in it. And, at the moment, we’re nowhere close to its historical measures. Last time we had stagflation, inflation was in the double digits, and unemployment was at 8.5 percent. Currently, inflation is at 2.7 percent, and unemployment is only at 4.6 percent.

Let’s switch gears. People are wondering if we’re at a market bottom. For this one, I’d say we’re darn close. And, for many stocks, it’s already happened. In fact, there are plenty of great stocks firmly entrenched in strong up-trends, and there’s no shortage of stocks making new 52-week highs.

Here’s where the cheap part comes into play.

First, I looked at the companies in the S&P 500 (excluding the Financials), and looked at the median projected quarter-over-same-quarter-a-year-ago period, and found that the estimated growth rate was 9.4 percent. (Even with the Financial included it was still 7.7 percent.) That’s pretty good.

Then I decided to see how the P/Es stacked up to their five-year high P/E ratios and their five-year average P/E ratios. That’s when I realized how cheap this market really is. P/E ratios are more than 18 percent lower than their five-year average, and more than 41 percent off of their five-year high.

So what to do?
I’m running screens right now that are showing solid-earnings forecasts (Qtr-over-same-Qtr-a-year-ago), growth rates better than their five-year average and trading at P/Es more than 40 percent below their five-year Average:

• Estimated EPS Growth Q(1)/Q(-3) >= 10
  (Qtr-over-same-Qtr-year-ago)

• Estimated EPS Growth Rate F(1)/F(0) >= Five-year average historical growth rate

• PE / Five-year average PE <= .60
  (i.e., PEs more than 40 percent below their five-year average.)

Here’s a few stocks that passed this screen:

CGNX Cognex Corp.
FDP Fresh Del Monte
XLNX Xilinx, Inc.

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