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Red Thumbs Too Easy to Find -- The Market is Overvalued



October 23, 2009 – Comments (10)

I've been adding quite a lot of red thumbs lately.  Many overvalued companies are out there and I'm locking in excellent start prices on some of these.  I'm inclined to say the market as a whole is overvalued.  I'm still able to find reasonably undervalued stocks to buy, but the level of undervaluation is no longer as egregious and many stocks that were formerly very undervalued are now only slightly undervalued. 

I only go long in real life and I'm actually still buying certain stocks (bought some stocks this week), but I finally have to say that there are way too many highly overvalued companies out there and only a few that are very undervalued. 

I should say this: I don't look at the number of the Dow or the S&P 500.  Determining level of undervaluation or overvaluation based on a number is utterly worthless.  I'm making my "market is overvalued" declaration because I can find many very overvalued companies and just a few very undervalued companies.  That's an important distinction that many of you likely ignore.

I'll also note that I'm not shorting any of my red thumbs in real life.  Overvalued stocks don't necessarily go down in price very reliably, especially in irrational upswings.  I choose to be only long in real life.

10 Comments – Post Your Own

#1) On October 23, 2009 at 12:46 PM, Starfirenv (< 20) wrote:

Bullish- Interesting perspective on overall mkt valuation here. I would be interested in your thoughts. 

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#2) On October 23, 2009 at 1:05 PM, chk999 (99.96) wrote:

You are probably right, but that doesn't mean it can't get more overvalued in the short run.

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#3) On October 23, 2009 at 1:07 PM, JakilaTheHun (99.92) wrote:

I think the market is probably fairly valued or slightly-overvalued; not sure if that evaluation is worth much.   

I've been examining PATR as a short opportunity, but there are a few issues.  The outlook for trucking moving forward is dismal, if you ask me.  It's going to be displaced by rail more and more over the years due to higher oil prices and potentially, more state and Federal transportation costs being passed on via tolls. 

My only problem is that they have substantial real estate holdings and many of these holdings have been held for 12-25 years and are in a lot of the markets that have gone up significantly over the past few decades (suburban NoVa/MD, Baltimore, suburban Atlanta, etc.).  No telling what those properties are actually worth, but there's a chance some are significantly undervalued on the financial statements.  

If it weren't for those properties, I'd say PATR was easily overvalued.  With those properties --- I have no idea. 

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#4) On October 23, 2009 at 2:50 PM, TMFBabo (100.00) wrote:

@Starfirenv: My declaration is based on anecdotal evidence at best.  My favorite measure of total market valuation is the PE-10 or the CAPE (Cyclically Adjusted PE Ratio); it's called different things depending on who's talking about it.  It's the price to 10-year-average-earnings.  I've often mentioned 10 year average PE in some of my pitches, as I believe it to be a much more stable measure of price to earnings.  I hate using PE based on one year, as this can lead to value traps (recently, we saw still-inflated 2008 earnings from the tail end of the recent boom coupled with depressed prices from the crash). 

Without looking, I'd guess that the CAPE would be in the upper portion of the "fairly valued" range as well.  I personally dislike fairly valued stocks.  As a Graham fanboy, I believe in requiring a margin of safety to some degree.  When buying a fairly valued stock, you get no margin of safety!

@chk999: You are correct! I remember seeing you (or at least I think it was you) posting a comment recommending never to red thumb a company under $5.  I've gotten my butt handed to me with TLB and I now skip many red thumbs because they're too risky. 

I may be early with some of these red thumbs, but I'm reasonably confident in them at these entry points.

@JakilaTheHun: Thanks for the extra info.  As you've probably guessed, I made my red thumb based on net assets, earnings, and historical prices.  I try to avoid due diligence on CAPS picks that I never intend to touch in real life (especially a red thumb!)

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#5) On October 23, 2009 at 3:12 PM, cbwang888 (25.42) wrote:

USD is overvalued.

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#6) On October 23, 2009 at 3:15 PM, JakilaTheHun (99.92) wrote:

I think TLB is the most obvious red thumb I've come across lately.  I can see no reason why it would be worth as much as its selling for.   

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#7) On October 23, 2009 at 7:13 PM, Starfirenv (< 20) wrote:

Bullish, thank you for the response. I'm with you by the way. Always enjoy opposing views, as in the article, as food for thought. Rec'd already.

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#8) On October 24, 2009 at 1:15 AM, simplemts (< 20) wrote:

BULLISH, You gt'd CHBT which I have been following for several months now for my RL portfolio.  Any thoughts on going long real at today's price?  I'm looking more for an entry of $12 to minimize risk.  What are your thoughts on it?

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#9) On October 24, 2009 at 7:55 AM, outoffocus (22.87) wrote:

Go Phillies!

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#10) On October 24, 2009 at 9:25 AM, TMFBabo (100.00) wrote:

@JakilaTheHun: I think TLB is trading at an absurd price, but I was just trying to say that for stocks under $5, you almost have to be sure they're worth absolutely nothing.  The only large companies I red thumbed below $2.50 or so were FRE and FNM in the past few months. 

@simplemts: I sold CHBT in real life when it made its recent run-up.  As you can see, I carry quite a few picks in my CAPS portfolio.  I only own or consider owning a tiny fraction of those green thumbs.  I like CHBT at $11 or $12, which is about where I bought it last time.  You may or may not see that level again.  When I pick something in CAPS, I'm making a statement that I believe I can close the pick later for at least 5-10 points.  From $14.50 or so, I believe I'm good for at least 5 points (to get those accuracy points!)

@outoffocus: You win the "best comment" award.

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