Opportunistic Investors Should Be Getting Curious

The price-to-peak earnings multiple is 10.1 times this week. This represents a huge 25% drop from our last newsletter at the end of September. It is hard to remember a more depressing market than we saw over the last two weeks. The Fed cut interest rates, engineered a rescue package for the banking industry, and orchestrated a world wide effort to provide liquidity to banks but the market would hear none of it and stocks fell like a rock. Clearly, what we are seeing can only be described as a crisis of confidence around the world and for good reason. 

However, the fact is that there are opportunities to buy stocks that are undervalued in this market and hold on for better days. So, it is anyone’s guess when investors will begin to recognize the value in the market and dive in, but we think that last week’s selloff should get the opportunistic investor to at least become curious.  Valuation alert: since we have tracked the S&P 500 price-to-peak earnings multiple beginning January 1989, the previous low was 11.7x!

The percentage of stocks selling above their 30-week moving average has fallen to 2% this week. Again, the major selloff last week has left this sentiment indicator tumbling to historic levels. Since 1998 when we began using this metric, we had previously seen a low of 11.9%. Furthermore, in our last newsletter this sentiment reading was about 30%, which gives you an indication of how fast it has fallen. Our readers know that when we notice a decidedly bullish or bearish trend in sentiment, we like to be on the opposite side as the crowds. After all, “conventional wisdom is an oxymoron” has been a guiding principle for our firm’s investing philosophy. That being said, this is a market that people will remember for many years and it is possible that fear, uncertainty and doubt could continue to dominate the market for a little while longer before it turns around.

Our asset allocation model remains at our most bullish stance. It is our belief that the underlying fundamentals of the stock market have taken a back seat to the investor psychology of fear, uncertainty and doubt. There are stocks that have legitimate, serious problems, many of them financials, but there are also many stocks that have strong fundamentals that have been dragged down in this wretched downturn in the overall market. It makes us a bit uneasy, but the unprecedented nature of it makes it worthy of a mention: we have not a single “Overvalued” rating in our coverage universe of over 5500 equities. This is heavily due to an oversold adjustment factor on every sector right now. To put it simply, stocks fell so fast that in the short term the market looks very oversold. Again, we are in a very unique situation with the market but we have to believe based on our experience in equity research that we are nearing a capitulation. Although the rebuilding process may be slow, this combination of very low valuations and very depressed sentiment cannot continue indefinitely.

Comments

[5kDow:]

Valuation for select stocks are attractive, however when the panic selling hits, valuations go out the door and that is when the real opportunities are presented.

2008 Oct 14 04:14 PM

[Dividends A...:]

We've been seeing such panic selling in a number of stocks that even in this environment were hardly effected on an earnings or asset basis.

I wouldn't get very technical in this environment as I believe emotions (especially fear) are reining free havoc on the markets. If people need the money and want to bail on their equities I don't think technicals are much help - they just want out.

Good article though

2008 Oct 14 04:19 PM

[whidbey:]

For the very long term investor your work is helpful I suspect, but that does not describe most investors these days. Most move in an out trading, scalping, then retreating for another set up. Most do not do well, and have suffered in this market. If... and only if this market trends from this point does your advice offer much help. I am sorry I see no trends developing until we believe the financial system is stabilized so we can concentrate on earnings and comparative values. Not ready for your insights yet.

2008 Oct 14 05:54 PM

[anarchist:]

Not another "bottom" call? Monday they were rampant on SA, like politicians it's the old "finger to the wind" game.

2008 Oct 14 09:41 PM