Market Valuation Just Above Average

by: David Brown

January was a good month for the market as the S&P 500 reached a new 5-year high at 1498, up about 5% for the month. February has started strong, up yet another 1%. Mid-caps dominated the month, along with Small-caps, but no style/cap did poorly. For the month, the leading sectors were Healthcare, up a whopping 9% -- as our forward looking SectorCast had predicted -- along with Industrials, up about 8.5%, followed by Financials and Energy, up about 8%.

Here are the Market Stats.

This week, there is a paucity of economic news, and corporate earnings reports wind down considerably from the recent pace. Unfortunately, the first economic report this week was Factory Orders, which had been forecast to come in at 2.4%, a giant leap from last month's Sandy-influenced -0.3%. Although Factory Orders were up +1.8%, falling short of expectations was all it took to get profit-taking on a roll. The S&P fell almost 1.2%, dragging all sectors into the red. Not pretty, but not unexpected after the steady climb of the past month.

Since the S&P 500 hit a new 5-year high on Friday, it's prudent to take a hard look at valuations, which we did this weekend. The good news is that even before today, market valuations within the Sabrient GARP 1000 were a tad above average. The forward P/E for those 1000 stocks was 13.6, compared to an average value of 11.6 and well below three different highs in the past four years, all in the 19-21 range. The GARP 100 were a bit pricier (purely from a relative viewpoint) at 9.3 compared to an average valuation over the past four years of 7.2. Of course, it's much higher than the low of 5.3 in early March of 2009, but still within close range of former highs in the mid 8s and high 7s, which has been normal for this period. Frankly, it is hard to get worried about the very best GARP stocks trading at prices representing a multiple of less than 10. Consider that the S&P 500 averages in the mid-teens.

So barring major political or military turmoil, it seems likely that the domestic markets should continue a modest advance, with bonds at historically low yields and real estate well off its lows. For now, the most attractive sectors appear to be Healthcare, Financials (not including major banks and investment banks that may still face more pressure over the misdeeds of the 2008 era) Technology, Industrials, and Consumer Non-Cyclicals. Energy should not be overlooked, but today's sharp drop in oil prices may signal short-term weakness. The remainder of the week contains few additional economic releases, but each one will have its chance to spook the market. Thursday's Initial Jobless Claims and Friday's Trade Balance should be the most important.

We have used our computer systems to identify a handful of stocks that you might want to consider adding to your portfolio, and continue to recommend VIX or its derived indices (VXX, VXZ, etc) as a hedge to your portfolio due to its extremely low value. The VIX was up 13.7%, and the VXX was up 5.76% today!

4 Stock Ideas For This Market

This week, I found four highly ranked stocks from the "GARP" preset search in MyStockFinder, selecting only Small- and Mid-cap stocks.

Smith & Wesson Holding Corporation (SWHC)

  • Trading at 10.6x earnings and 8.8x forward earnings
  • Recent upward analyst revisions to EPS projections
  • 214% projected EPS growth for current quarter, 11% next quarter, and 153.7% for 2013
  • 30% projected 5-year EPS growth rate
  • Reports earnings on March 5

United Therapeutics Corporation (NASDAQ:UTHR)

  • Trading at 10.5x earnings, 9.5x forward earnings
  • Recent upward analyst revisions to EPS projections
  • 63% projected EPS growth for current quarter, 5% next quarter, 23% 5-year
  • Reports earnings on February 25

Western Refining, Inc. (NYSE:WNR)

  • Trading at 27x earnings, but 8x forward earnings
  • Recent upward analyst revisions to EPS projections
  • 185% projected EPS growth for current quarter, 34% next quarter
  • Reports earnings on February 28

Texas Capital BancShares Inc. (NASDAQ:TCBI)

  • Trading at 13.75x current earnings, 11x forward earnings
  • Recent upward analyst revisions to EPS projections
  • 18% projected current quarter EPS growth, 13% next quarter, and 15% for 2013

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.