Signs of a Frothy Market
Is The Stock Market Too High?
One Stock to Buy Now
With the stock market hitting one new high after another, some people are now asking, “Is the market too high?”
By some measures, yes.
The charts are definitely strong, with stocks like ARM Holdings (ARMH), Netsuite (N) and Yelp (YELP) breaking out to new highs after their earnings reports.
Earnings reports have been excellent generally, with one company after another citing improved demand as the economy gradually improves.
Speaking of the economy, last week’s news that unemployment had fallen to 7.6% was huge. And the situation in Europe is improving too, though not as rapidly.
As a result of these factors, I’m now seeing more “amateurs” entering the market. For example, last Monday, two of the stocks I’ve been recommending in my Cabot Stock of the Month, ServiceNow (NOW) and Tesla Motors (TSLA) closed at record highs.
And just two days later, mid-day Wednesday, as both stocks were pulling back normally, I received the following from a subscriber
“May 1st is just one of those days. NOW is down 3.05 % and TSLA is down 2.92 % from the time I bought this morning. I have decided to HOLD in the hopes that the market turns up. What do you think?”
I think, of course, that the market trend IS up, and the fact that this person thinks a couple of HOURS makes a downtrend (and worse, that this person expected those stocks to go up right after he bought them) is a sign that we’re closer to amateur hour.
I’m also seeing more and more bullish articles on “story” stocks like Tesla. Last week one brokerage had the guts to project that TSLA will hit 200 within five years! (It’s 55 now.)
Lastly, I’m even seeing the return of published “whisper numbers.” These are the earnings estimates that analysts really expect a company to hit; they’re higher than the official numbers, and they’re signs of growing optimism.
I put it all together, and I conclude that market sentiment is definitely heating up.
However, that doesn’t necessarily mean the market is at or near a top. In fact, all that evidence is subjective, which means you can’t really hang your hat on it.
But there is one very objective measurement of market value in the Cabot stable, and it comes from the database of Roy Ward, editor of Cabot Benjamin Graham Value Investor.
Here’s what Roy wrote in last week’s issue. “The stock market has moved to my risk Level 3 ranking. My objective is to increase the bond and defensive holdings in the Classic Value Model when the stock market rises. When the market falls, I will decrease the bond and defensive holdings in this model. This strategy will reduce your risk and increase your profits.
“If the Dow Jones Industrial Average, which is currently 14,900, falls to 13,292, my allocation mix will change to five stocks and three defensive positions, or Level 2. If the Dow rises to 15,903; my allocation mix will be Level 4, composed of three stocks and five defensive positions.”
Simply put, on a scale of one to five, where one is undervalued and five is overvalued, the market is now at three. Not high!
And this is a good place to note Roy’s record!
Cabot Benjamin Graham Value Investor achieved a major performance milestone last Friday. Since inception 17 years ago, a composite of Roy’s combined models has grown 10-fold, meaning that a portfolio started on 12/31/95 with $100,000 is now worth $1,000,000.
By comparison, a $100,000 investment in the S&P 500 at the same time would now be worth just $262,000, and a $100,000 investment in Berkshire Hathaway, managed by my idol Warren Buffett, would now be worth only $510,000.
For more, click here now
So, considering that general market sentiment is a bit high, I’m going to suggest to you today a stock that is NOT high. In fact, it’s gone nowhere all year, and last week it pulled back to touch its 200-day moving average, which I think offers great support.
In fact, with both revenues and earnings set to grow faster than 20% in the year ahead, I think the stock is a low-risk buy at this level.
Now, normally, I’d tell you its name right here, but I already mentioned ServiceNow (NOW) and Tesla Motors (TSLA) above, so if you want the name of this stock, I’m asking you to do a tiny bit of work.
Reply to this email and ask me the name.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
P.S. Chloe just finished choosing 30 great new income securities—stocks, trusts, ETFs, REITs and mutual funds—for the latest issue of Dick Davis Dividend Digest, and she would like to send it to you free.
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