The Enterprising Investor’s Guide 3-2-09

The price-to-peak earnings multiple has reached a new low for this bear market at 8.2x. Since the beginning of 2009, there has been only one week of trading that finished in the black. Furthermore, February’s S&P 500 decline of 11% continues the trend of six consecutive monthly declines, dating back to September of last year when the financials began their horrid decent. Yet, deep into a brutal bear market, there are still legitimate questions as to when the root problems such as the housing market will begin to recover.

S&P 500 earnings have been steadily declining since the summer of 2007, but we encourage you to read the Wall Street Journal op-ed article by Wharton Professor Jeremy Siegel. As we recounted in the Ockham blog, do not believe those who tell you that blue chip stocks still are not cheap at current levels. When evaluating earnings on a market-cap weighted basis (the same way the index is calculated) the earnings picture is not so bleak as some would argue. Bigger companies, while still suffering, are not struggling as much as smaller companies in this environment. Thus, comparatively speaking, the valuations of the larger components of the S&P 500 look more attractive than the smaller ones, which are less able to levitate their earnings right now.

S&P 500

The percentage of NYSE stocks selling above their 30-week moving average remains remarkably low at just 9.3% this week. There is a lot of pessimism in the stock market right now, and for good reason. As we noted above, equity investors are getting pounded week after week and, on top of this, the President’s budget was released last week and holds the promise of higher taxes on investment beginning in 2011.

It is apparent that the economy is in a downward spiral as the housing market continues to decline and unemployment statistics continue to worsen. What the market needs is a stabilization in the macro economy before equities will begin to appear too cheap to ignore. At this point, there is a lot of money on the sidelines that is waiting to be put to use, but this money is waiting for evidence of some sense of stability. We are hopeful and eager to see signs of this stabilization when the February employment report comes out on Friday.


The Ockham asset allocation model continues to advocate over-weighting equities compared to a normal asset allocation target. As has been our routine lately, we must caution readers that we are not advocating buying all stocks at present. There are quite a few stocks that look “attractive” based on historical metrics but still have far too much risk associated with them to make for an appropriate investment; financials such as American Express (AXP) and Citigroup (C) come to mind. Being cautious and defensive is certainly warranted right now and setting stop losses on any purchases could be wise to avoid getting stuck. That being said this is a time when equities are cheap and sentiment is due to rebound over the next few months and there are some risks that are worth taking.

Equity Allocation

The Enterprising Investor’s Guide 3-2-09

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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