Stocks NOT a Bargain

By on October 17, 2006

Originally published in June 1999:

INDEXES ON 5/28/99

DJIA 10,559.74

S&P 500 1,301.84

NASDAQ 2,470.52


Despite the recent market weakness, overall, stocks are still no bargains. It will take a lot more than a measly 7% correction to bring back value to the market. However, there are still companies that can be had on the cheap, and the list of these has grown in the past several weeks. So we keep looking.

Long term interest rates are not likely to rise any further. With the American public spending like drunken sailors and boasting a 0% savings rate, the economy won’t get any further demand side stimulus because there isn’t any room for growth in consumer spending. The only exception is overseas, which is making a tepid comeback and could provide some small incremental growth.

The internet stocks have been pummeled hard and the drubbing is likely to continue. There is just too much new stock (IPOs) being rushed to the market. Every Tom, Dick and Harry with an idea to catch the public’s fancy is trying to float some stock and get rich before the bubble bursts. Unfortunately for them, the gate is closing fast and a further sickening plunge is almost a certainty given the fundamentals of this business, which aren’t that great for generating profits given the opportunity for unlimited competition. The internet will change the world for the better, but the content providers, bookstores and CD stores aren’t going to make anyone rich given their current valuations, which are still sky-high.

Last month we compiled what we felt were 10 of the cheapest and 10 of the most overpriced stocks in the US markets today. The 10 cheapest gained 5.7% for the month, while the 10 most overpriced stocks lost 20.6%. During the same time, the S&P 500 index lost 2.5%. If you had purchased the cheapest 10 and sold short the overpriced 10 the annual return comes out to 315%. This is absolutely not recommended since selling short these stocks can lead to substantial short term losses…..losses most investors cannot emotionally deal with. The overpriced stocks are simply stocks most investors should steer clear of unless they have an incredible amount of faith and tolerance for volatility.

In a continuation of what we started last month we have again compiled what appear to be the 10 cheapest and the 10 most overpriced stocks in the US stock market today. Again, this is merely a subjective opinion based on fundamental factors and estimated future value given the demographic factors that will contribute to growth prospects over the next 3-5 years. We do not expect the performance of this month’s list to diverge as surprisingly as last months.

The Cheapest 10 (In alphabetical order):

Security Symbol Price PE Price/Sales Market Cap (Mils) Comments

Beverly Enterprises BEV 7 1/4
N/A 0.54
Nursing homes meets age wave

Borders Group BGP 17 1/8 17
Cheap Internet Play

CHS Electronics HS 4 7/16 10
Bottom fishers’ dream

Clayton Homes CMH 11 7/16 11
Housing for retirees

Delta Airlines DAL 57 3/8
Boomers will travel

Pier 1 Imports PIR 11 1/16 14
Boomers upgrade furnishings

Tenneco TEN 23 5/16 141
Beaten down to a bottom

Thor Industries THO 26 5/16 13
Motor homes for boomers

Trinity Industries TRN 31 3/16 7
Cyclical play; cheap

Winnebago Industries WGO 16 1/2 11
Rebounding motor homes

The Most Overpriced 10:

Security Symbol Price PE Price/Sales Market Cap (Mils) Comments

At Home Corp. ATHM 126 3/4
N/A 219.29
Services too costly BCST 110
N/A 132.85
Nice site; competition arrives

CustomTracks CUST 60
Overpriced on hype

EToys ETYS 60 9/16
N/A 67.73
Enter ToysRUs

Geocities GCTY 100 1/8
N/A 123.31
Idea of personal web site stale

Healtheon HLTH 89
N/A 68.25
Ludicrous valuation

Internet Financial Services IFSX 17 7/16
N/A 8.45
Overpriced broker

Inktomi INKT 103
N/A 121.89
Increasing losses PCLN 112 1/32 N/A 116.58
Will be big; not big enough TSCM 35 3/4
N/A 71.50
A street of potholes

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