The Enterprising Investor’s Guide 2-9-09

The price-to-peak earnings multiple advanced to 9.7x this week as last week was a good one for equities with stocks up more than five percent, which broke a streak of four straight weekly declines in January. The equity rebound was certainly welcome, but much of the recent optimism in the market is related more to external factors such as President Obama’s stimulus plan currently working its way through Capitol Hill. The fact that the market’s rally was boosted by speculation over proposed legislation is a concern this week because last week’s euphoria can be erased quickly should the bill encounter more resistance than projected. Furthermore, the Obama administration is putting maximum importance on passage of the economic stimulus bill while delaying action on a follow-on bank rescue plan until the stimulus passes.

In short, we are advising caution over the short-term because anytime market upside is dependent on good news from Washington there can be great volatility. While the short-term direction of the market is unknowable, we maintain that valuations have become far more attractive when looking at the long-term.

S&P 500

The percentage of NYSE stocks selling above their 30-week moving average increased to 15% as of Friday’s close. This sentiment measure has begun to improve after an extremely rare and prolonged period below the 10% mark. The improvement from last week is partially due to many stocks seeing nice gains last week and the fact that the 30-week moving averages are lowering as equities continue to stay well below their levels prior to the October collapse.

We regard this sentiment measure as a bullish indicator as we are starting to see improvement from the extreme lows of the last four months. It is important to remember that investor sentiment is a leading indicator and even though unemployment and many other macro data points have continued to deteriorate, many analysts believe that we have seen the worst and these data points will in fact flatten or improve in the coming months.


Our asset allocation model remains at the bullish end of the spectrum, as this is an attractive time to be exposed to equities based on historical valuation metrics. Recommending over-weighting the target equity percentage in your portfolio is largely based on contrarian buy signals referenced in the two previous charts. Again, historical valuations are attractive and investor sentiment is quite low and mean-reversion suggests that equity prices are low and due to rebound.

Please remember that we are not suggesting that the market has bottomed and this recession clearly defies many of the historical norms. However, there are stocks worthy of investment in any market and in this market we like companies that have a lot of cash, no debt issues, are market-share leaders among their peers and whose stocks have been beaten down in the bear market. Such companies are in no danger of bankruptcy and will have a maneuverability in this environment to buy up distressed competitors, buyback their own stock or sit on their cash and wait for better days. Some examples include: Apple (AAPL), Exxon (XOM), Garmin (GRMN), Gerdau (GGB), Microsoft (MSFT) and Public Storage (PSA).

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.

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