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As easy as it is to take pot shots at the economy...

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November 03, 2009 – Comments (2)

There are plenty of places that we can point to if we want to try and prove that the economy is still struggling. Debt? Check. Unemployment? Check.

At the same time we can find a number of indicators that show an economy clearly on the mend. Numbers out of the manufacturing industry have been looking darn good, and while consumer sentiment still has a long way to go before reaching pre-crisis levels, we're faaar off the depths from earlier this year.

But my focus is on investing and so economics really only matters to me insofar as it impacts the investing environment. And at least from what I see, I don't think the economy is the biggest worry for investors right now -- it's valuations. 

Click here to see my full review of economic indicators and how they play into the investing environment.

Although I probably have a less dour view of the economy than Jeremy Grantham, I find myself agreeing with his bottom line -- that a lot of junky/risky stocks have rallied and higher quality (dare I say "blue chip?") stocks are looking attractive.

Matt

2 Comments – Post Your Own

#1) On November 03, 2009 at 7:08 PM, checklist34 (99.70) wrote:

that sentiment... that "quality" stocks are now very cheap while "junk" stocks that rallied more are no longer bargains... is now basically the view held by "everyone" so to speak. 

If you take a look at the facts of the matter, most of those "junk" stocks that have led the rally are still far below their historic highs while many of those "quality' stocks are at or recently at or near all time highs.

AMZN is without a doubt a quality company, its also at an all time high and a p/e of 80 or something.

AAPL is without a doubt a quality company, recently hit all time high.

Going away from tech/growth, MMM is w/o a doubt a mega "quality" company but its fairly near its all time high as well.  

Meanwhile the "junk" stocks that have led the rally are frequently still a tiny fraction of former highs, still frequently trading at fractions of book value, and so forth.

Politely, I have to disagree with "everyone" on this one.  Best returns over the next few years will still be "junk" as it slowly demonstrates that it isn't "junk"

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#2) On November 03, 2009 at 8:06 PM, TMFKopp (98.13) wrote:

Hmm... I guess I would point out a few things.

First off, of course you can pick out counter-examples to the "buy quality" thesis. Amazon and Apple are two great examples. Great companies, but I wouldn't touch them with a ten foot pole right now thanks to their valuations. 

I actually own MMM, but wouldn't add to my holdings at these prices either.

So, yeah, not every stock that could be refered to as "blue chip" is worth buying blindly right now, but I think there are a lot of good plays among that group.

Next, the notion that "everyone" subscribes to the "buy quality" theory is neat, but it ignores the fact that many of the top quality stocks haven't really done much of anything lately -- at least when you compare their perfromance to many lesser issues.

And finally, maybe this is just an issue of semantics, but I hope you're not really saying that the "junk" stocks are deals because they're trading at fractions of their former high prices. If that is really your position then you're correct, many of those issues are trading at fractions of their former highs, but I'd heartily disagree that this metric suggests that they're great deals right now.

In fact, I'd argue that in many cases those past prices were overvaluations based on unsustainable earnings. Looking ahead I don't think a lot of those companies are going to see those earnings levels or high valuations, so they're unlikely to even sniff former highs.

Matt

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