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47% Upside Potential in Stocks Over the Next Two YearsBy
Monday, February 11, 2013
"Stocks are still cheap," James Stack explained to us.
Stack is the founder of InvesTech Research. He predicted the stock market crash in 1987. He's also one of the first investors to become bullish after the 2009 bottom. (Four days after the ultimate bottom in March 2009, Stack told his subscribers that we were approaching "the buying opportunity of a lifetime.")
Stack was speaking to the crowd at the World MoneyShow I attended in Orlando earlier this month. Even after the recent move in January, he sees more upside in stocks.
If Stack is right – and if corporate earnings grow as analysts expect over the next two years – the "fair value" for stocks is 47% higher than where it is today. Let me show you how...
Stack is still bullish on stocks today...
Based on a unique way of looking at things, he says stocks are still cheap. And I believe he is right.
Stack's idea is simple:
When interest rates are low (like they are today), stocks have historically traded at much higher valuations than they do today.
For example, Stack noted that since 1950, the S&P 500 Index has traded for an average price-to-earnings (P/E) ratio of 17.8. (The P/E ratio is a typical measure of stock market value. It tells us how much we're paying for the current earnings of a given stock.)
But during periods of low interest rates – when 90-day government T-Bills pay less than 3% – stocks traded much higher, at an average P/E of 21.
Today, 90-day T-Bills pay just 0.07% in interest. So based on history, stocks should be trading at a P/E ratio of 21, at least. But today, stocks are at a P/E of about 17.
But your upside is much greater than just the P/E going from 17 to 21...
You see, analysts expect earnings to grow around 22% by the end of 2014. The market would have to increase 22% over the next two years just to keep up with its current P/E ratio.
If earnings rise by that amount and the stock market trades up to its historical P/E, the overall stock market would have to rise 47% over the next two years.
It's crazy to imagine now. But it's completely possible...
Things are finally starting to get better in the U.S. Corporate balance sheets are flush with cash. The economy is slowly improving. Things are getting "less bad."
I think the market will ultimately go much higher from here. As my colleague Steve Sjuggerud explained in a recent DailyWealth:
As long as Bernanke keeps interest rates low– which we expect him to do for the next two years, at least – investors have no choice but to buy stocks. When the money starts to flow into equities, we could even see a P/E ratio much higher than 21.
It's easy to see why Stack thinks the market is cheap... and why he's so bullish on stocks today. We could see 40%-50% gains over the next two years. And that's just to get to "fair value."
In sum, you want to keep owning stocks.
Good investing,
Brett Eversole
Further Reading:
Market NotesNEW HIGHS OF NOTE LAST WEEK
Alleghany (Y)... insurance
Chubb (CB)... insurance
American Financial Group (AFG)... insurance
Steel Dynamics (STLD)... steel company
Becton-Dickinson (BDX)... medical products
Medtronic (MDT)... medical devices
Johnson & Johnson (JNJ)... drugmaker
Procter & Gamble (PG)... household goods
Walgreens (WAG)... drug stores
Hershey (HSY)... "the basics"
Netflix (NFLX)... home movies
Virgin Media (VMED)... media
Ericsson (ERIC)... mobile Internet
JDS Uniphase (JDSU)... networking
Symantec (SYMC)... Internet security
Automatic Data Processing (ADP)... payroll processing
3M (MMM)... manufacturing
Cheniere Energy (LNG)... natural gas exports
Chicago Bridge & Iron (CBI)... natural gas infrastructure
C&J Energy Services (CJES)... oil & gas drilling |
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