This Is What Happens When Everything Is Undervalued

Okay, I recognize that this is somewhat unnerving, especially for us.  But it is important to point out that as of Sunday night,our ratings officially branded  the entire stock market at undervalued.  Not specific sectors, not specific industries, not specific stocks… ALL STOCKS.

Surely we must be joking, right?  Well, not really (and don’t call us Shirley).  The reality of the math is that when reviewing all securities verse normal stock price movement and historical cash, sales, and dividend levels, we had reached a point that is almost unimaginable for many stocks.  Friday’s trading last week was the straw that broke our back, and put us over the mathematical edge.  We have not a single security (of more than 5,500) that is rated as fairly valued or overvalued.

So, Ockham, what does that mean?  Well,  we are basically screaming at the top or our lungs that investors should be buying stocks now.  Given today’s price action (DJIA up 936.42) we may appear to be stating the obvious, but I quickly want to point out why our ratings are, in fact, so optimistic.

I also want to be very clear, we are not calling a bottom in any way.  In addition to being a foolish act that only CNBC commentators should attempt, we do believe that continued macro-economic pressure will force specific sectors, industries, and stocks lower.  However, a prudent investor is now choosing particular companies and industries which are likely to outperform significantly over the intermediate to longer term.  We do not envision a depression for the US Market.  So now is the time to start nibbling, nibbling, nibbling. 

What is vital to also point out at this time is that not all under-valued securities are created equally.  At Ockham, we recognize that logic and math may drive much of the market’s action on a regular basis.  But in times like these, every investor must heed the warning signs that irrational behavior is in control.  That is what can keep you from making bad decisions worse (i.e. selling at the bottom.)

When we review the stocks in our universe of coverage, some are rated as undervalued because of their own particular situation, and some are rated undervalued because their sector or industry as a whole has become oversold.  It is important to understand the difference, and as such, we ask you to always review our explanations on each company.  Don’t just look at the ratings and headlines, take the time to read more of our analysis to understand where cash levels, sales levels, and dividend rates are compared to normal levels.

So while we are saying the stock market hasn’t looked this attractive, in… well… ever (kidding), we are saying that you still must do your homework and understand why every stock you select is in your portfolio.  Remember, this is just like chess, and in chess you don’t move until you know why you are choosing to make that move.

Undervalued = ALL STOCKS

Comments

[debtacid:]

How can you “value” stocks when the Fed intervenes daily to prevent price drops. This does not add stability or confidence that "everything
is undervalued". I don’t see a market at work here. Only Fed puppeteers desperately throwing tax dollars at insolvent institutions.

2008 Oct 13 05:05 PM

[Ben Dinsmore:]

This post would of been a little more approptiate before today wouldn't it, if the market was "screaming" at us?

2008 Oct 13 05:24 PM

[one more once:]

Just a side note. Volume was rather light for a day where the Dow was up 936 points. Could be the PPT at work promoting the Central Banks intervention in the financial markets, yet again, while concurrently suppressing precious metals. The most interesting aspect all this intervention will have on earnings and hence, value, is will it be deflation or inflation? I suspect eventually it will be revealed the latter.

2008 Oct 13 06:28 PM

[nevket240:]

Heading should have read

This is what happens when everything is manipulated. Usually around 3PM.

regards

2008 Oct 13 06:59 PM

[Jimmy Goodwin:]

Corporate America has barely felt the effects of what is predicted, yet we get the biggest one day gain since the bottoming of The Great Depression, nice one government, at this rate it will be 2019 before we hit a bottom. Predictions on earnings and unemployment are deteriating rapidly week by week, how can we have a cheek to even predict a bottom.

2008 Oct 13 07:56 PM

[Deuce $:]

I agree with the previous post. The volume was nowhere near the closing volume from last Friday and probably most of last weeks daily trading for that matter. I just wonder how many people moved their money to FDIC insured banks last week and couldn't trade today and if that will have an affect on tomorrows activity. I assume that there will still be a rally tomorrow after the Fed comes in on their high horses and puts their plan out there for everyone to see. However, I think it will be short lived simply because the economic numbers later this week will show that none of this is or will be helping the economy and the earnings of your undervalued companies will come out over the next several weeks showing why they are valued the way they are.

2008 Oct 13 08:04 PM

[jacobslatter:]

Yes. Jump back in children! All is well! Our wise men have convened and in one short weekend, they've finally mastered the fine alchemist art form of turning excrement into gold!

2008 Oct 13 08:18 PM

[johngonole:]

Easy to sound smart now.....I seriously doubt out of 5,500 stocks you couldn't find one that was fairly valued. Actually I believe AMZN still looked pricey for a retailer. Then again if you still have your average 5 year predicted growth rate for each company set between 15-25% a year maybe you did. This article was complete waste of my time reading.

The media finally took a rest on pounding the drums of despair over the weekend. That was the difference. People who hadn't sold said why sell now and the media didn't push them over the edge. I think the fact that it is an election year is making things much more volatile because the media wants to hype every issue to influence the voters as much as they can.

2008 Oct 13 09:11 PM

[sheople:]

Welcome Socialism with a Free Market Name. The Central Banks/Treasury will control everything. The Stock Market was a farce today. Too bad.

2008 Oct 13 09:19 PM

[Buddy Fox:]

WTF is this dribble doing as the main story on SA?

2008 Oct 13 09:49 PM

[DonJ:]

You can thank Cramer!

2008 Oct 13 10:05 PM

[Lin:]

Roy-P A new stemcell firm sounds great , but truth be is that the USA + states are broke ! Who is going to pay for all this " state of the art medicine ?" I read just recently where a 51 year old women with cancer was denied chemo treatment by the state of Oregon's insurance program , this also happened to a 52 year old man in the UK with cancer ! Get ready America , you all want cheap + free healthcare , but as soon as you get really ill - for get it , you're a goner ! Linda Rn

2008 Oct 13 10:45 PM

[hoover:]

I would only say that the market looks undervalued based on current earnings and the fact that it has dropped so much. The Dow from October 1929 through mid 1932 dropped from 381.17 to 41.22 -- an astounding 89% drop. Along the way, there were six major bear market rallies. Obviously, investors believed the market was undervalued at the beginning of each bear market rally. The first rally, a short time after the Octber crash, took the Dow from 198.69 to 294.07 over a six month period, for a gain of 48%. Then it of course dropped to succesive lower values with each bear rally. Things are different now? Yes. We have far more debt, banks are leveraged up beyond their eyeballs, and it is a worldwide problem. But, on the positive side we know more about economics, communications are far better, and central governments are trying to work together and they have more clout. Different, but still not beyond the possiblity of disaster.

2008 Oct 13 10:48 PM

[punk_ash:]

why don't you guys get it. No one knows the bottom, we are close to the bottom if not at it already. The markets may hit 12000 and get back under 8000 for another bottom, 3 months from now. The fact is that we just do not know the bottom...

2008 Oct 14 03:34 AM

[Wefwef:]

Way late to call bottom, it's 20% behind already.

2008 Oct 14 03:35 AM

[ashizashiz:]

Does anyone watch Star Trek?

There is a great Star Trek episode from the late 1960s entitled “Specter of the Gun”. Kirk, Spock, McCoy, Scotty and Chekhov are compelled to fight Wyatt Earp and his gang in a showdown at the O.K. Corral. Curious aliens have, of course, orchestrated the battle: some kind of a moral psychodrama. Anyway, in this episode Mr. Spock develops a “knock-out” gas from ingredients found in Doc Holiday’s office. The protagonists logically figure that if they can render the Earp Gang unconscious, then they won’t have to fight them at the O.K. Corral. (And as we know, the Earp’s defeat the Clanton’s at the gunfight at the O.K. Corral. And as Mr. Spock so aptly points out, “history cannot be changed.”)

All are certain that the gas will work; but just to be sure, Scotty volunteers to be the test subject for the agent. Spock, for one, is spellbound, when the potion fails to work. “Fascinating” he quips. Spock goes on to explain the enormity of this paradox. “The potion” he explains, “must work. By all laws we know, it simply cannot fail. And yet it has failed”. Spock goes on to theorize that a massive manipulation of the crew’s brain patterns must be occurring. He also explains that this knowledge, if used correctly, can save the crew from certain demise at the O.K Corral.

Back to 2008. At some point, the massive manipulation of our brains, orchestrated by Spanky Paulson and all of his uber-wealthy cronies, will end. Reality will intrude. The global economy MUST crash because there are simply too many dollars "worth" of worthless assets gathering dust in the safes and hard drives and account ledgers of the world's financial instutions. Tens of Trillions of dollars worth! And no amount of mass hypnosis (in the form of 'pundits optimism'), or empty words (in the form of government guarantees on EVERYTHING), or spin can change reality. Get that? Reality cannot be changed.

2008 Oct 14 10:11 AM

[mwswi:]

Morningstar is featuring an article written by Russel Kinnel | 10-14-08 | 06:00 AM. The article is titled:

Grantham: Stocks Haven't Been This Cheap since 1987
Market seer Jeremy Grantham predicted financial debacle, and now he's buying.

The article states:

"In July 2007, Grantham warned of a financial bubble as hedge funds, private equity, and homeowners gorged on debt.

Today Grantham says we're in for slowing global economic growth. In particular, he believes China will slow down more than expected as most economists have taken in their forecasts for Chinese growth only a touch. He argues that China is very dependent upon exports and that the countries on the other end of the trade are too weak.

Grantham expects that slowing growth will also keep commodity prices falling. "I would keep out of commodities for the near term," he said.

In addition, he sees the deleveraging--an unpleasant unwinding of debt-- leading to a reverse wealth effect for companies and consumers alike. Both had been living beyond their means and now will have to adjust to below-average earnings and income, and that means they'll be tight with spending.

Nonetheless he's now more constructive about equities because he believes they are trading at severely depressed prices. He said that at the end of Friday, global equities were trading as cheaply as they had been since the 1980s. In fact, the U.S. had traded below GMO's fair value estimate--though as we spoke Monday morning a rally had brought it back to around fair value. Specifically, he prefers blue chips to small caps or highly leveraged companies.

"We're buying carefully and slowly," Grantham notes. Why slowly? "When bubbles correct, they usually overcorrect so that the market is selling well below fair value."

Interestingly Grantham also says he's now neutral on financials--a sector he has long disliked. He notes that most of the credit crisis is likely behind us and that the newest plan of worldwide governments to inject capital into banks in exchange for shares is a big improvement on past plans.

So, add Grantham to the list of sage investors who see this as a huge buying opportunity. The list includes Marty Whitman and Dan Fuss."

2008 Oct 14 11:26 AM

[Blue Star:]

Bud Fox your an Idiot...Blue Star likes Anaconda Steel

2008 Oct 14 01:05 PM

[Gaucho:]

Yes technology has improved. The naked shorters are no longer Paper Hangers they just use digital imputs to fake shares instead of printing the fake stock certificates.

It is the same in that the naked shorters will have all the money and the rest of you suckers will loose all of your retirement.

It is the same in that we are entering a great depression.

It is the same that there wil ne no enforcement of the laws for fake shares.

Take your money off the table while you still can.

2008 Oct 15 01:32 PM