A Tale Of Two Types Of Stocks

In the short run the market will not be overbought until the end of the day today or tomorrow. The reason it is unclear is because starting tomorrow the 10 day moving average of the NYSE Advance-Decline line will be dropping positive numbers for 3 days. But tomorrow's number is only slightly positive while Thursday and Friday we will be dropping large positive numbers. The oversold reading that has been supporting the bulls ends today and this indicator will soon be aiding the bears for a few days.

Many safe stocks such as consumer staples and utilities trade richly.  Stocks such as Coca Cola and Colgate trade at twenty times forward estimates. This is the norm for these "safe" dividend paying stocks. The valuations are even more egregious in the REITs and MLPs.

Despite the rich valuation in many stocks the overall S&P 500 is trading at 14 times forward earnings. That is because if a stock does not fall into this safe or high dividend category no price seems to be too low. I understand the benefit of managements that return cash to shareholders. It makes it a lot less likely that they will do a stupid acquisition or destroy shareholder value in other ways.

I am doing my hunting in the cheaper area of the market. In many cases these managements are returning cash to shareholders, just in the form of a share repurchase rather than a dividend. I see limited upside in purchasing mature companies at twenty times earning. If any of these "safe", mature companies stumble the downside could be large.

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