Keep Looking For Buys

4/2/2012


The Dow Transports have not confirmed new highs in the Dow Industrials since Feb. 3. Meanwhile, as shown in Market Strategy, the percentage of stocks on the New York Stock Exchange trading above their 200-day moving average has jumped to 77% — a level suggesting the risk of a correction is relatively high.

Timing secondary corrections with precision is very difficult, and the market's primary trend remains bullish under the Dow Theory.

• For the S&P 1500 Index of small, midcap, and large stocks, the median trailing price/earnings ratio is 17 — below the norm of 18 since 1994.

• Some 251 S&P 1500 companies have delivered earnings growth above 10% over the last year yet have trailing P/E ratios below 15 — nearly equal to the long-term norm of 250.

In such an environment, a wholesale move out of stocks seems premature. Instead, we intend to be relentless in upgrading our buy lists. This week we are dropping BMC Software ($40; BMC) from our Buy List and Long-Term Buy List, replacing it with a software stock we like better, CA ($28; CA). We are also adding United Health Services ($42; UHS) to our Buy List. Stocks now represent 93.1% of our Buy List and 89.8% of our Long-Term Buy List.

For our Focus List, limited to our very favorites for year-ahead returns, Cisco Systems ($21; CSCO) and Macy's ($40; M) are replacing Chevron ($107; CVX) and MasterCard ($431; MA). Considering Cisco's operating momentum, the stock seems very cheap at 11 times expected current-year earnings. Macy's trades at a modest 12 times the consensus for the fiscal year ending January, and favorable revision trends suggest the consensus will be exceeded.

Chevron and MasterCard remain attractive holdings for both the next year and the next 24 to 48 months, so only subscribers mimicking our Focus List should sell these names. But our enthusiasm for the energy sector has diminished somewhat. MasterCard's growth prospects are excellent, but the stock is a bit expensive at 20 times expected 2012 earnings.


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