Industrials Near Bear-Market Point

8/17/2015


Lately we've been selling stocks from our buy lists without replacing them, which says a lot about how we view this market. The stocks to which we're most attracted generally have one of three problems:

They are already on our buy lists. No matter how much we like a stock, we're not going to double or triple its target weight on our Buy List or Long- Term Buy List. Our Focus List, limited to our favorite 12 to 17 stocks, is a highly concentrated portfolio, one best used as an add-on to an existing portfolio. Our Buy and Long-Term Buy lists are designed to take nearly full advantage of the free lunch that diversification provides — without settling for second-tier names.

We're also reluctant to double up on industry risk, especially on the Focus List. For example, both Southwest Airlines ($39; LUV) and CBRE ($38; CBG) rank among our favorite 15 stocks. But we like Alaska Air Group ($79; ALK) and Jones Lang LaSalle ($174; JLL) a bit more, so those stocks get the nod for the Focus List.

They look poised to go lower in the near term. Stocks tied to industrial production, especially those with any exposure to energy or China, have been hit hard. United Rentals ($66; URI), a stock we recently sold after a disappointing quarterly report, seems unduly cheap at eight times expected 2015 earnings. But the stock earns Quadrix scores below 10 for Earnings Estimates and Performance — numbers that typically mean we'll be better off letting the dust settle before doing any bargain-hunting.

They seem a bit expensive. As the table below suggests, cheap stocks are in short supply. The number of stocks with middling price/earnings ratios is not far below historical norms, and we continue to think that investors buying such reasonably valued growers as Jones Lang and CDW ($39; CDW) will earn solid returns from current levels. But lately we've been finding it harder to unearth reliable growers at attractive valuations, partly because such stocks have performed so well over the past year.

BREAKDOWN BY PRICE/EARNINGS RATIO
----------------- % Of Stocks With Trailing P/E: -----------------
Below
12
12 To 16
16 To 20
Above 20
NM Or
Below 75
S&P 500 (large-caps)
Recent
11
19
22
45
3
Norm since ‘94
16
21
20
37
6
Min. since ‘94
4
10
6
6
2
Max. since ‘94
60
32
30
61
19
% of months with lower % since ‘94
31
35
61
76
16
S&P MidCap 400
Recent
11
16
22
48
3
Norm since ‘94
14
21
19
39
6
Min. since ‘94
4
10
7
11
2
Max. since ‘94
49
33
28
57
21
% of months with lower % since ‘94
39
14
75
87
8
S&P SmallCap 600
Recent
9
17
21
47
7
Norm since ‘94
16
19
18
39
9
Min. since ‘94
4
10
9
12
2
Max. since ‘94
47
29
26
58
30
% of months withlower % since ‘94
27
36
80
80
55

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