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What the Market Wants: Who’s on First?

Posted on the 07 November 2011 by Phil's Stock World @philstockworld

Who’s on First?

By David Brown, Chief Market Strategist, Sabrient Systems

What the Market Wants: Who’s on First?
What a charade we have had!  Who is the Greek Prime Minster today? Tomorrow?  How about Italy?  The market has invested literally months trying to figure out what will happen in the European version of “Who’s on first?”  How many investment dollars have been won and lost speculating on all of the questions related to the PIIGS debt ratings (and of course our own!)?  Who even knows what the right question is?  The domestic stock market has been fixated on the myriad of possibilities.

But when it comes down to results, it is quite likely that only speculative correct bets will win anything in the long-term fixed income market.  The short-term market rewards us with next to nothing except the stress of whether or not we will recoup our investments.  How long will it take for real estate values to stabilize?  Who’s on second?

So let’s assume that all we have left to choose from are equities and precious metals. There are other choices, but they are not as easily accessible to most of us.  After today’s sharp rise in gold and silver prices, do we really want to bet on those?  We are left with equities.  Which economy if any should we choose?  Who’s on third?

What can we say about equities?  Most public company CEO’s are paid handsomely to generate earnings for us.  Can we find companies run by honest CEOs that are properly valued?  Even bargains?  I think we can.  Apparently so does Warren Buffet as Berkshire invested $23.9B in equities in the third quarter (Berkshire’s largest quarterly investment in 15 years).  But companies whose earnings are growing and are selling at historically reasonable, if not bargain prices, should be a good investment regardless of what European sovereigns do. The Fed has promised to keep interest rates low and control inflation and they will certainly try.

Our economic indicators have not been great: last week PMI and ISM were on the weak side, but factory orders and initial jobless claims improved.  Today the wildly varying consumer credit was up $7.4B versus an expect $5B. Not much else is coming this week other than the trade balance on Thursday and Michigan Sentiment on Friday.  So why not buy some well-priced equities and hedge with instruments like the VXX or FCE?  Incidentally the VXX, from the Monday October 31 open until the open today, gained nearly 15%. There are a wide variety of hedging options beyond those two, but hopefully you get the idea.

Here are the market stats.

Market Stats. Last week’s leading style cap was mid cap Growth, down only 1.5%. If you go back a month, three months, six months, or a year, the leader is either small, mid, or large cap Growth and the loser is Value of any cap.  The forward earnings PE for our Top 100 Garp (growth at a reasonable price) stocks is 7.61, down from last week’s 7.84 and well below May’s 8+ readings.

So why not chose from flight to safety sectors such as Healthcare, Technology, or Energy, buy a strong Garp stock or two, and let the rest of the world worry about “Who’s on First?”

4 Stock Ideas for this Market

This week, I built a search in MyStockFinder ( that focused on Small and Mid-Cap Garp (growth at a reasonable price). I included Buys and Strong Buys. Analyst Revisions were given importance as were Earnings, Balance Sheet, and Fundamentals. Here are three stock ideas that look intriguing:

Celgene Corporation (CELG) – Healthcare
Kennametal, Inc. (KMT) – Industrials
NetGear, Inc. (NTGR) – Technology

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
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Full disclosure: The author does not hold any of the stocks mentioned in this week’s “Stock Ideas.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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