Change in Leadership

By on October 14, 2006

Originally published in May 1999:

INDEXES ON 4/30/99

DJIA 10,789.04

S&P 500 1,335.18

NASDAQ 2,542.85

Editorial

The market is currently as confounding as during any time in history. A massive swaying of leadership between the tech stocks and the cyclicals has been unmistakable. Just as the cyclicals appear to be gaining control, the techs counterpunch with a strong move to the upside. Lately, it looks like the cyclicals are gaining the upper hand with the techs fading. However, it could be completely reversed next week. Who will win this battle for investment dollars? In my opinion, the cyclicals will prevail, not because the techs are going to falter significantly in their growth rates, but because those companies whose fortunes are tied to a strong economy are currently a much better bargain. The Dow has been incredibly strong the past month with a gain in excess of 1,000 points. So much for those ominous (hah!) technical indicators I mentioned last month. The stock market is a fairly accurate indicator of future economic growth, so the market may be forecasting continuing prosperity.

Harry Dent, author of the recent top-ten best seller The Roaring 2000s, has been incredibly prescient in his predictions for the future. He successfully forecasted the current bull market back in 1992. He also called for the pullback last summer/early fall and subsequent strong rebound. The last I heard he was predicting a very robust economy and market for 1999. I figured the economy would hit a weak patch this year due to the overextended (debt-wise and time-wise) consumer. However, the latest evidence points towards a strengthening worldwide economy. This will probably help the US economic growth rate and prove Dent correct and me wrong. If this is the case, cyclical stocks may well be the best place to be.

A couple of months ago I predicted a 20-30% correction before the end of the year. If the economy gets too strong, interest rates will rise putting a damper on stock prices. I still think there is a very good chance of this sort of set-back occurring. However, I’m not doing anyone any favors if the Dow is at 12,000 when it makes the move down, which just might happen.

I have compiled what I feel to be the 10 cheapest and the 10 most overpriced stocks on the US stock market today. This is simply my subjective opinion based on fundamental values and estimated future value given the demographic factors that will contribute to growth prospects over the next 3-5 years.

The Cheapest 10 (In alphabetical order):

Security Symbol Price PE Price/Sales Market Cap (Mils) Comments
Brunswick* BC 24
12 0.54
2,207
Demographic boost imminent
Champion Enterprises* CHB 18 5/8
10 0.39
905
15% growth on the cheap
Coachmen Industries COA 18 7/8
9
0.41
314
Dirt cheap motor home maker
CBRL Group Inc. CBRL 20 3/16
12 0.91
1,213
Food for old fogies; lots coming
Fleetwood Enterprises FLE 24 11/16 8
0.29
861
Due for a rebound
K2 KTO 10 3/16
35 0.31
169
The Death of Leisure? Not!
Merisel MSEL 1 19/32
7
0.03
128
1/6th the average PE multiple
Monaco Coach* MNC 27 3/4
13 0.56
347
The cheapest hi-growth vehicle
Royal Caribbean* RCL 36 15/16 20 2.60
6,227
Double October low; still cheap
Service Corporation Int’l SRV 20 3/4
16 1.82
5,643
Baby Boomers don’t escape alive

*Disclosure: I currently have a long position in these stocks

The Most Overpriced 10:

Security Symbol Price PE Price/Sales Market Cap (Mils) Comments
Amazon Com AMZN 172 1/16
N/A
31.41
27,719
Books = low margins
America Online AOL 142 3/4
211
41.70
133,300
See www.netzero.com
Ameritrade Hld A AMTD 133 9/16
329
33.82
7,754
Brown $5; Datek $9.95
Charles Schwab** SCH 109 3/4
107
14.77
44,597
Brown $5; Datek $9.95
CMGI Inc. CMGI 254 9/16
161
89.82
11,883
Ludicrously overvalued
E*Trade Group EGRP 115 1/2
N/A
34.03
13,282
Brown $5; Datek $9.95
Ebay Inc. EBAY 208 1/8
3,071 491.99
26,035
Amazon wants some action
Excite Inc. XCIT 146
N/A
39.08
7,859
I’m not excited
TheGlobe.com TGLO 60 1/8
N/A
30.34
641
Competitors galore
Yahoo Inc. YHOO 174 11/16 1,094 155.00
35,027
Not bad, just expensive

**Disclosure: I currently have a short position in this stock

From around the Web:

The Securities and Exchange Commission (SEC) has put a new feature on their website. It is a program that will calculate the future value of a mutual fund investment. You simply plug in your starting investment, the anticipated annual rate of return and any fees the fund charges. You’ll be able to see the difference between, say, a Schwab index fund which has an annual expense ratio of 0.4% and a similar Vanguard index fund that charges an annual expense ratio of 0.2%. The program is downloadable, or you may run it directly at the website located at http://www.sec.gov/mfcc/mfcc-int.htm

“Pump and Dump” is a phrase used to describe the tactic of many stock newsletters, which is to first buy a thinly traded stock, tout it incessantly across the internet, then dump it like a hot potato at a tidy profit. The Stock Detective website has put out a directory of the “Pump and Dumpers” at http://www.financialweb.com/stockdetective/list.asp

Wade Cook is probably the greatest con-man of our generation. He is exposed for his charlatan ways at http://www.garywall.com

Excellent Post from a web-based forum regarding the futility of trying to beat the market:

“First, unless you can predict the future, it’s not gut instinct. New information drives stock prices (up or down).

Second, those whom you perceive as being “more savvy,” presumably due to their recent – and temporary – success, are part of a parade, not a crowd (you probably still don’t believe me). Go to the library tomorrow and look who the stock market geniuses were in Fortune and Forbes 10, 20, 30 years ago. Look at what BC Forbes said after the crash in ’29 (“This is the best buying opportunity of the century.” The market went down another 80% for 12 years).

Third, you could have memorized every technical indicator from here to stochastic-land, it’ll never make you richer. Many years from now, the only time you’ll ever regret wasting is the precious time squandered on technical analysis.”

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