Forget Bubbles: Bargains Abound In This Overlooked Industry

Nov. 27, 2013 2:23 PM ETAGCO, CAT, JOY, KMTUY, LNN5 Comments
John P. Reese profile picture
John P. Reese

Enough with the bubble talk.

Yes, stocks have been on a tear in 2013, and yes, valuations have risen significantly. But with the S&P 500 trading for 17.6 times trailing 12-month operating earnings, 1.46 times sales, and 2.2 times book value, we're hardly at bubble levels.

Don't trust the denominators of those metrics because you think the Federal Reserve's quantitative easing policies have propped them up? To an extent and in certain areas, sure. But again, not to bubble-like proportions -- particularly not when many of the same people crying bubble have also been saying (correctly) that QE's liquidity in large part has not been making it into the broader economy.

I think the bubble talk is indicative of where investor psyches are. After two bubbles burst within eight years of each other, causing terrible stress and pain, investors and the media -- the vast majority of whom were blindsided by the two previous bubbles -- don't want to be burned again. At the slightest hint of overvaluation, they are thus fretting about bubbles.

I'm not saying that stocks will keep rising indefinitely - no one knows what will happen in the short term. The reality, however, is that many stocks in many areas of the market remain quite reasonably priced for long-term investors. One area my Guru Strategies (each of which is based on the approach of a different investing great) are finding value right now is the far-from-glamorous construction and agricultural machinery industry. With an average PE-to-growth ratio of 0.60 and an average price/sales ratio of 1.1, the industry is one of the highest rated by my Validea Value Index. Many of the stocks in this industry have been hit hard thanks to concerns about slowing global growth (especially in China). But value investing is about finding beaten-down stocks whose shares have been hit harder than their fundamentals merit. Here are five

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John P. Reese profile picture
John P. Reese is considered an expert in the systematic investing strategies of legendary investors, including Peter Lynch, Ben Graham, Warren Buffett and others. He has been active in the development of fundamentally-based quantitative models since the mid-90s. His research on Seeking Alpha will include stock ideas, strategy and value investing pieces, behavioral finance concepts, systematic and modeling methods as well as other long term investing concepts. John is founder and CEO of and also co-founder of Validea Capital Management. Validea Capital runs an actively managed ETF that utilizes the fundamental stock selection models of investing legends as well as a set of robo advisor allocations through Validea Legends and Validea Legends Income. John holds two U.S. patents in the area of automated stock analysis and is considered an expert in the field of quantitative stock selection using the strategies of investing legends. John is a columnist for, and Canada's Globe & Mail and is co-author of “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies". He holds a master's of business administration from Harvard Business School and a degree in computer science from MIT.A more complete biography can be found here:

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