Kevin Matras explains why the market looks so 'cheap' and how to start planning your market-bottoming purchases. Stocks in this week’s article are Cognex Corporation (NASDAQ: CGNX), Fresh Del Monte (NYSE: FDP) and Xilinx, Inc. (NASDAQ: XLNX). Click here for the full story exclusively on Zacks.com: http://at.zacks.com/?id=109
Screen of the Week written by Kevin Matras of Zacks Investment Research:
This week I’m writing about the ‘value’ of the market.
First, I know everyone is debating whether or not we’re in a recession. No need to debate. I have the answer: We’re not. We’re in a short-term economic slowdown and the economy is still growing. With the dramatic interest rate cuts (with more possibly to follow), along with the stimulus checks, ordinary tax refunds and tax breaks for business; most economists believe the economy will be looking good in the second half.
Secondly, people are now talking about stagflation. No need to talk about it. We’re not in it. In fact, at the moment – we’re nowhere close to its historical measures. Last time we had stagflation; inflation was in the double digits, and unemployment was at 8.5%. Currently, inflation is at 2.7% and unemployment is only at 4.6%.
Now let me switch gears. People are wondering if we’re at a market bottom. For this one, I’d say we’re darn close. For many stocks, it’s already happened. There are plenty of great stocks firmly entrenched in strong uptrends, and there’s no shortage of stocks making new 52-week highs.
Here’s where the cheap part comes into play. First, excluding Financials, I looked at the median projected quarter-over-same-quarter-a-year-ago period for companies in the S&P 500, and found that the estimated growth rate was 9.4%. (Even with the Financials included, it was still 7.7%.) That’s pretty good.
Then I decided to see how the P/Es stacked up to their 5-Year High P/E ratios and their 5-Year Average P/E ratios. That’s when I realized how cheap this market really is.
P/E ratios are more than 18% lower than their 5-Year average and more than 41% off of their 5-Year High.
So what to do?
I’m running screens right now that are showing solid earnings forecasts (Qtr-over-same-Qtr-a-year-ago), growth rates better than their 5-Year Average and that are trading at P/Es more than 40% below their 5-Year Average.
* Est. EPS Growth Q(1)/Q(-3) greater than or equal to 10
* Est. EPS Growth Rate F(1)/F(0) greater than or equal to 5 Yr. Avg. Historical Growth Rate
* PE / 5 Yr. Avg. PE less than or equal to .60
(i.e., PEs more than 40% below their 5 Yr. avg.)
Here are a few stocks that passed this screen:
CGNX Cognex Corp.
FDP Fresh Del Monte
XLNX Xilinx, Inc.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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