Market Conundrum

by: David Brown


Year-to-date, all major markets are down with the S&P 500 doing the best at only -0.2%.

Since February of 2009, undervalued growth stocks have been the best choice for most of us.

No better place to put your money.

What can we say after yet another sharp sell-off? Since last Friday's open, the S&P 500 has fallen nearly 3%, the Nasdaq has fallen more than 4.3% and the Russell 2000 has fallen more than 3%. We might argue that the S&P 500 held slightly above its 50-day moving average, after falling below it. Or that the Nasdaq didn't, and it is well below the 50 day moving average and only about 4% above its 200 day moving average. Perhaps, it would cooler to remind you that the style/cap down last week was Small-cap Growth, off only 0.46% or that Mid-cap Value was up 1.18% on the week to lead the cap/styles (see market stats). Is the glass half full or half empty?

Market Stats

Frankly, it could be either. I have read compelling arguments for both this weekend. The fact is that we just don't know. Year-to-date, all major markets are down with the S&P 500 doing the best, down only 0.2%. The DJI, NASDAQ and Russell 2000 are all off around 2% or a bit worse. Does the economy look 2% worse than it did at 2013's end? Domestically, globally, or universally? That's probably a stretch with political progress domestically. But in turn, one could argue that the market was overvalued by 5% to 10% at year end.

It is a conundrum. But where else shall we put our money. All sectors were down today as well as Friday, except for Utilities. But do we really want to put our equities in Utilities with the likelihood of a rising 10-year treasury yield over the next year or so? Housing prices are up a bit, but if so, then one should expect the economy to grow.

I hate to sound like a broken record but since February of 2009, undervalued growth stocks have been the best choice for most of us, and I would argue that it still is. It just isn't that hard to find a few dozen stocks that carry very reasonable forward P/Es and are destined to grow their earnings over the next few years.

If that is frightening, then consider hedging with a VIX-based hedge. Today that was great (up more than 11%), but for most of the last year, it hasn't been that much help.

3 Stock Ideas for this Market

The following stocks were selected from the top of our stock universe with great earnings growth projections, reasonable valuations and recent upward revisions to earnings estimates.

Valero Energy Corporation (NYSE:VLO) -Energy

  • Trading for 10x current earnings and 8x forward earnings estimates
  • Analysts have revised earnings estimates up in the last 7 days
  • 23% projected EPS growth current quarter, 100% next quarter, 345% in 2014, 10% 5-year

American Air Lines Group Inc. (NASDAQ:AAL)-Industrials

  • Trading for 7x forward earnings estimates
  • Analysts have revised EPS estimates up in the last 7 days
  • 60% projected EPS growth next quarter, 61% in 2014, 39% 5-year

NXP Semiconductors Inc. (NASDAQ:NXPI)-Technology

  • Trading for 41x current and 12x forward earnings estimates
  • 26% projected EPS growth this quarter, 44% next quarter, 28% in 2014, 36% 5-year

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.