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Just like the cover of my book, "Put Your Money to Work," the picture depicts a reluctant "Bear" selling his undervalued shares to the savvy investor. In due time, the savvy investor sells his shares he bought from the "Bear" to the "Bull" after the share price has risen and become overvalued. The whole "buy low, sell high" premise.
It was in my opinion that in February/March, when the sentiment was extremely dire, the market became so over sold a bear market rally was imminent.
Experienced investors would know that the market would likely rally until it got to the point when the sentiment changed and the majority of investors actually believed a new bull market was in place. The whole "be greedy when others are fearful, fearful when others are greedy" premise.
AAII investor sentiment now has 47.67% of their members who responded to their survey being bullish, 31.4% bearish and the remaining 20% neutral. I would put that in the category of "majority believing we are now in a bull market." 70%+ were bearish around the March low.
I want to draw attention to valuation metrics. I will use Starbucks (NASDAQ:SBUX) as my example. Here is a 2-year weekly chart from bigcharts.com.
SBUX was estimated to earn $0.97 per share for fiscal year ending Sept 2008 and grow their earnings 18.3% per year over the next 5 years in April of 2008. Clearly, that was overly optimistic. Instead, SBUX earned .67 per share in fiscal 2008 and that included a .24 gain from "unusual income." As we can see from the chart above, SBUX share price continued to fall as those earnings expectations were simply not met.
7.07 per share in November of 2008 marked the bottom. SBUX also went below 9 again in March of 2009.
In today's valuation metrics, a fair present value of SBUX earning .76 per share this year and growing earnings 15.25% per year for the next 5 years would be around $10 a share per my analysis.
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I'm confident Starbucks will be an ongoing business operation for years to come with coffee houses all over the world. Liquidation is unlikely, but the premium over liquidation needs to come down in the future. P/E of 10 because they will be likely to grow earnings only 5% -10%, that would give them a PEG of 1.0 - 2.0, which I consider sound.
Savvy investors who were focused and smart enough to buy shares from the "Bear" in November or March can now consider selling to the "Bull" and wait patiently for the next time the bear rears its fierce claws and takes down stocks again.
Click to enlargeIn summary, I believe the "Bull" is back in this market and taking profits now is prudent.
Disclosure: No position in SBUX