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Shayne Heffernan on Wall St, Asia, Brics

Apr. 24, 2011 2:38 PM ETMSFT, XOM, PG
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Shayne Heffernan Best Buys at the start of this busy Earnings this week are the undervalued Exxon Mobil (NYSE:XOM), Procter & Gamble (NYSE:PG) and Microsoft (NASDAQ:MSFT).

The Wall St rally has been relatively concentrated and real growth is not evenly distributed, the net result has been an disproportionate distribution of valuations in sectors where growth has already been seen.

I feel that some valuations are beginning to look extreme, and others quality stocks have been overlooked in the recent rally, using the Warren Buffett concept of “what would you pay to own the business” I can not justify the large price earnings ratio’s of many companies. The trailing price-to-earnings ratio in the S&P’s materials sector is more than 20 times current earnings compared with 16.3 for the whole market however large gaps in valuations have emerged, according to our research.

It is these gaps that are most appealing for investors, those companies the rally has forsaken are the ones that now look most attractive.

Before the financial crisis the consumer and financial sectors benefited from huge credit expansion but now are trading well below a fair value.

Growth in valuations has shifted to industrial, materials and energy stocks that benefit from strong demand in emerging markets, as well as a technology sector boosted by robust demand from businesses, but again that growth has been poorly distributed across the entire market.

Average earnings growth across those sectors amounts to almost 33 percent in the first quarter over a year ago.

That is more than double the estimated growth for the S&P 500 and towers over the 5 percent growth in a financial sector burdened by a weak housing market.

This week investors in those highly valued equities will want to see at least stable performance in developed markets as they gear up this week for a press conference by U.S. Federal Reserve Chairman Ben Bernanke.

Tough questions will be asked about what monetary policy will look like after the Fed’s easy money policies come to a close at the end of June.

This week, 180 of the S&P 500 companies are set to report earnings. Of companies that have reported to date, 75 percent beat analysts’ expectations. That is just above the average over the last four quarters, but well above the average of 62 percent since 1994.

While earnings are driving ahead at full force, investors will also focus on the first of the Federal Reserve’s press conferences. The press briefing on Wednesday is scheduled to start after the rate-setting Federal Open Market Committee wraps up its two-day meeting. Bernanke, the Fed chairman, intends to give four press briefings a year.

There will likely be questions raised about the type of monetary policy the Fed will pursue when its $600 billion bond-buying program, known as quantitative easing, or QE2 on Wall Street, draws to a close at the end of the June.

The Best Buys at the start of this busy Earnings this week are the undervalued Exxon Mobil (NYSE:XOM),Procter & Gamble (NYSE:PG) and Microsoft (NASDAQ:MSFT).

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