Headlines are screaming about the "insanely expensive" stock market, but is that really accurate? One analyst sees plenty of undervalued stocks in the Dow Jones right now.
Investor optimism swept the globe this morning, pushing world stocks to a four-month high. The Dow Jones Industrial Average (DJIA) piggy-backed on the wave. The index jumped more than 400 points to start the week.
There’s plenty of room to run, according to Freddie Lait at Latitude Investment Management. He believes many stocks are still undervalued. They could see billions of dollars inflow as hedge funds catch up.
If you look at US banks, they’re trading incredibly cheap compared to history. Energy stocks, retail stocks we still believe are very cheap in America. Nearly all cyclical stocks, even the highest quality ones… they’re trading at massive discounts.
Can this rally keep pushing higher? Absolutely, says Lait. Mutual funds and hedge funds are still on the sidelines, with cash levels close to 2009 figures. That money will likely come back to stocks and push the market higher.
Chinese stocks just posted the best one-day session in over a year. The CSI 300 climbed 5.6% on Monday, propelling the index to a five-year high. Hong Kong stocks were up 3.8%. The Dow surfed the wave overnight, and it opened to spectacular gains.
As of 9:51 am ET, the DJIA had surged 418.19 points or 1.62% to 26,245.55.
The S&P 500 and Nasdaq rallied almost as aggressively, gaining 1.41% and 1.59%, respectively.
The excitement swept up traders in Europe too as consumer spending bounced back.
I can already hear the bears coming for me as I type. The headlines are screaming about the “insanely expensive” stock market and record-high price-to-earnings ratio. How can stocks possibly be undervalued in this environment?
Well, as Freddie Lait explains, you just have to look in the right places.
The reason why the markets are expensive is because the tech and the growth stuff is expensive.
Although tech is outrageously expensive, everything else is dirt cheap: banks, energy, retail, cyclicals, travel. And guess how many of these companies make up the Dow Jones? Goldman Sachs, JP Morgan, Caterpillar, Chevron, Exxon Mobil, Boeing, to name just a few.
So yes, there are plenty of undervalued stocks to be found in the Dow Jones. If sidelined cash finds its way into these undervalued areas, the markets can keep going higher, says Lait.
But aren’t investors ‘irrationally exuberant’ right now?
Mutual funds are holding more cash than any time since 2009 – the start of a decade-long bull-run. Hedge fund positioning is historically low on equities.
Over the weekend, JP Morgan told clients that ‘elevated cash holdings’ could soon flow into stocks.
As for that ‘irrational exuberance’, the Wall Street Journal pointed to four indicators that suggest the opposite. Investors are actually cautious right now. Quoting Ryan Paylor at Thomas J. Herzfeld Advisors Inc, WSJ wrote:
Closed-end fund investors ‘are leaning more towards fear than greed.’
Traders are keeping a watchful eye on Covid-19 data as cases top 11.5 million worldwide. Six states in the U.S. have reversed their lockdown easing strategy, including California and Texas. A further 13 states have paused re-opening efforts.
Despite his bullish stance, Freddie Lait said the virus remains the “most concerning” issue holding stocks back.
Investors are largely focusing on positive economic data instead. U.S. nonfarm payrolls came in at 4.8 million last week – higher than expected. Manufacturing, services, and consumer spending data are all moving in the right direction.
Last modified: September 23, 2020 2:02 PM