Despite global worries, potential values in stocks
Tim Suffish
By Tim Suffish CFA, CPA
Vice President, St. Germain Investments
We, as inhabitants of this planet in the 21st century, are continually bombarded with data. Computing power and the internet have put the world at our fingertips, with mountains of information available just a few clicks away. Want to know who lead the big leagues in batting back in 1989? Two minutes on the web will get you the answer: Kirby Puckett, who batted .339 that year. Unless you were really interested in on-base percentage, which would give the title to Wade Boggs of the Red Sox. Unless you consider slugging percentage to be the deciding statistic, which would give the nod to Kevin Mitchell. You get the idea.
Stock prices are currently about 10 percent "undervalued" compared to the past 20 years.
There is a lot of information out there, and it is easier today to find the data to support your position, regardless of the side you choose. The world of economic and investment statistics is among the worst. The numbers can be crunched every which way; they can even be "tortured."
While we keep tabs on dozens of indicators and economic reports, I'll list for you here a few of the data points that help us in the decision making process. Sometimes they help us make a decision to buy, sometimes to sell, and sometimes, they assist with the decision to hold on tight.
As the name implies, the Index of Leading Economic Indicators (LEI), which is updated monthly by the Conference Board, is an index of 10 indicators that typically "lead" the broader economy.
Included in the calculation of the index are things like building permits, stock prices, manufacturers orders, and weekly jobless claims. All of these "leading indicators" have a history of forecasting economic activity in the future (typically 6 months or so); e.g. building permits will lead the actual construction. The six month average LEI is currently at a relatively high level.
Stock prices flash before our eyes on both the computer and the TV. In a vacuum, or over short periods of time, the prices have little predictive value. Over longer periods of time, however, the level of prices relative to earnings power is an indicator of how expensive, or cheap, the current prices are.
On this measure, stock prices (in the U.S.) are currently about 10 percent "undervalued" compared to the average pricing we've seen over the past 20 years.
Cash flows are an important metric by which to measure companies, but they are also useful in gauging investor sentiment.
For all of 2009, more than $350 billion flowed into fixed income mutual funds, more than double the cash flow that bond funds have seen in any year this past decade. Stock funds, however, did not fare so well.
Stock funds saw less than $10 billion in inflows over the same time period. Due to the multiple booms and busts and the Wall Street bailouts, the "retail" investor does not trust the stock market. We see that in the numbers.
The mountain of funds that have flowed into bonds will, we believe, gradually find its way back to the stock market once stability is regained. This is great potential buying power, in an environment where interest rates are low.
While there are many concerns in the marketplace today; Eurozone debt issues, unemployment, and the Gulf oil spill to name a few, many of the indicators we follow offer encouraging signs for the long term investor.
Column provided to PRIME by: St. Germain Investment Management; 1500 Main Street, Springfield, MA; Phone is 413-733-5111 or 1-800-443-7624; web site:www.stgermaininvestments.com.
