The Enterprising Investor’s Guide 1-6-09

We would like to extend a Happy New Year to our newsletter readers and apologize for the two-week layoff around the holidays. While it is often useful to take a look back at the past year, that has already been done thousands of times, and really what more needs to be said about the worst year for equities since 1931. It was certainly a year that many investors would love to leave behind, but while the markets were definitely hugely disappointing in 2008–the S&P 500 dropping 38.5%– it is vital to remember that this has improved the risk/ return profile substantially for long-term equity investment.

The price-to-peak earnings multiple has improved to 10.4x as the year finished with a rally. The S&P 500 reversed a four week losing trend and gained nearly seven percent, albeit with light trading volume commonly seen around the holidays. What is predicted to be a fairly ugly first quarter earnings season will not get into full swing for a few weeks which will hopefully give the market an opportunity to continue its nascent upward momentum.

S&P 500

The percentage of NYSE stocks selling above their 30-week moving average has improved to 9.8% as of Friday the 2nd. Our sentiment indicator has gained fairly consistently over the last 6-weeks and could be poised to come back to more normal values. As we have continued to note, investor sentiment overall has been at exceptionally low levels for the last three months. In addition, consumer confidence has plummeted to new lows. The pessimistic view of the economy in general has lead to a flight to the safety of Treasuries, which actually increased in price by nearly 15% in 2008.

A consensus view of the economy has clearly been formed and investors would be wise not to fall victim to the prevailing herd mentality. After all, conventional wisdom is an oxymoron. For long-term investors, this is a justifiable time to be more exposed than normal to equities, not less.


Our equity allocation model for long-term, value-focused investors continues to point to a bullish outlook for stocks. The market appears undervalued by our valuation methodology, although we are not predicting a rapid rebound to DJIA 13,000! We are simply stating that while there is plenty of macroeconomic risk in this environment, certain stocks are trading at very compelling valuations. With price-to-peak valuations around 10x and sentiment extremely depressed for some time now, we believe that investors should be looking to increase their equity exposure selectively. The stock market, statistically speaking, will tend to revert to its norms, and we have been outside of the norms (undervalued) for quite some time now.

Equity Allocation

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

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