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Investing Specialists

Any Bargains Left?

Users are generally gloomy about valuations, but some are optimistic for large caps.

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With stocks gaining upward of 30% on an annualized basis during the past two years and the prospect of rising rates looming large over the bond market, many investors are naturally wondering what's next. Are there any pockets of opportunity left, or is everything pretty much trading in line with its fair value?

I recently posed that question to Morningstar.com users on the Hands On forum of Morningstar.com Discuss boards. To read the complete thread or share your own insights, click here.

Hiding in Plain Sight?
Simply put, few users could muster a lot of enthusiasm for any single asset class or security. One security type--large-cap blue-chip stocks--did receive repeat mentions from our users, but even those users seemed less than certain about the stocks' prospects.

Racqueteer wrote, "Large caps with solid balance sheets and global exposure may have the best prospects, but I'm not sure how great those prospects actually are in an absolute sense. I can't help seeing the U.S. more of a trade than an investment, but that can all change depending on how things work themselves out."

Darwinian noted that consumer staples firms were looking like a bargain just a few months ago, but he is less sanguine now. "Consumer staples may still be a bargain, though this opportunity is rapidly disappearing. From October through February,  Vanguard Consumer Staples (VDC) was virtually flat, while the S&P 500 went up 14%. Since then, the S&P 500 has been flat, while VDC has gained 6%."

Poster rblum27 was among the most confident posters, ticking off several dividend payers as good buys. " Intel (INTC) pays a nice 3.68% dividend.  PPL (PPL) pays a handsome 5.24% as does  Exelon (EXC).  Lockheed Martin (LMT) pays 3.90%. All five are due for a move once the dividend is discovered.  AT&T (T) has had a steady rise from $25 to $30 during the past nine months but still pays an attractive 5.68%.  Procter & Gamble (PG) is overdue for a nice move."

BillGun is looking at  Abbott Laboratories (ABT), noting that it's a favorite among Morningstar's stock analysts. "Abbott Laboratories, currently approximately $51 per share, is still well below its Morningstar fair value estimate, and also below Morningstar's Consider Buying price. Dividend yield--at 4%--remains historically strong. It remains a favorite of Morningstar's Josh Peters, also." Uncleharley concurs, noting "Abbott also represents one of those somewhat rare opportunities that combine value and momentum at the same time."

For racqueteer, the best opportunities aren't necessarily stateside. "There are almost certainly pockets of value in Japan and Europe that may bear fruit during the next few years. Asia or emerging markets? Longer-term value may be mostly baked in, but the little pullback we've been getting might lead to some low-hanging fruit over a year to 18 months."

Off the Beaten Path
Beyond the blue-chip theme, there was little consensus about which parts of the market could have upside.

Despite the threat of higher interest rates, Darwinian thinks Treasury Inflation Protected Securities are looking interesting, given that current prices for inflation-protected bonds are baking in fairly modest inflation rates. He wrote, "According to the Treasury, the yield spread between five-year TIPS and conventional bonds is predicting an inflation rate of 2.19%. The actual recorded CPI increase, for the past four months, has been 5.5% annualized. (Note that this increase has already been locked into the next inflation adjustment to the principal value of the TIPS.) This opportunity is disappearing; six months ago, the yield spread was predicting only a 1.57% inflation rate."

Uncleharley, meanwhile, believes that silver miners have been ignored in the stampede into hard assets. He wrote, "The past year's runup in the price of silver has been about double the price of the miners index. I think this has created tremendous value in silver miners. That is, of course, unless one thinks the price of silver is coming down."

 

Poster JimMason likes the for-profit education companies, noting that the political controversy swirling around the companies has created a buying opportunity. He wrote, "They are true value plays in every sense of the phrase: highly profitable companies that are unloved by everyone. Lincoln Educational (LINC) is the one I own and will probably buy more soon. Just look at the numbers and report back to me. Others are  DeVry (DV) and ITT Educational (ESI), but there are many, and most are highly profitable. I like Lincoln because of its small size and ability to adapt well to whatever government regulations might occur in the future."

Norbertc, meanwhile, is really thinking outside the box. "Looking at European residential real estate, I note that quality property in top-tier cities like London, Paris, Zurich, Switzerland, Munich, Germany, and Hamburg, Germany, is selling at all-time highs. Commercial property vacancy rates in some of these cities are at all-time lows. However, country property is often cheap at present, particularly in France. I think it represents excellent value. The only catch is that it's priced in euros, and the euro is overvalued in my humble opinion."

Color Me (Un)impressed
Several posters, meanwhile, can't find much to get excited about right now noting that valuations aren't especially low and fiscal worries loom large.

TOOOINTENSE wrote, "With the S&P outlook change comes the real issue of what happens to the entire U.S. market and, to a great extent, the world markets, should our politicians fumble what needs to be done on the debt issue. Equities worldwide will no doubt get hammered, as will most bonds, should a downgrade occur. We need to be careful in what we define as value because of this issue. I am a great believer in equities, but I see a train coming down the tracks. It might be time to consider getting out of the way."

Other posters are underwhelmed by a lack of opportunities on a bottom-up basis.

Johnson opined, "I can't find a thing I want to buy right now. My [Morningstar] stock screen is for five-star stocks with at least a narrow moat and medium fair value uncertainty, dividend yield greater than the S&P 500, [trailing-12-month] payout ratio less than 50%, and four year-over-year dividend increases. The only result has been  Johnson & Johnson (JNJ), which I've already got. My lesser screens don't turn up much more.

"Since I contribute to my accounts every two weeks I've just been dogmatically adhering to my master asset allocation plan--44.4% fixed income, 33.3% domestic equity, 22.2% foreign equity--by making incremental mutual fund purchases rather than letting excess cash accumulate."

Kayaker is also seeing a dearth of opportunities in the market and warned of possible difficulties ahead. "I sold several funds and stocks I thought were the riskiest in my portfolio last week, some purchased near the bottom of the 2008-09 train wreck. I have two or three more positions I am considering liquidating for the same reason. They aren't at Morningstar's fairly valued level yet, but I doubt the market will allow them to get that high.

"Currently, I can't find anywhere I feel comfortable putting the proceeds to work right now. I might just park a good part of my 23% cash position in  PIMCO Enhanced Short Maturity (MINT) for a while and see what happens in May and June. I have a nice list of what I would like to buy in my watchlist and several positions I would like to add to, but not at current valuations. I think the market is setting up for one of those perfect "sell in May and go away" scenarios well into the summer, but if I am wrong, I still have my more conservative stock and fund holdings that will benefit."

For ShanghaiRNMNC, China--and specifically, the property market--will be the next shoe to drop. "I am confident there are no value plays in China--especially when the property market is beholden to the Chinese politicians," this poster wrote. "Whenever the Chinese government officials attempt to rein in property through whatever means, they can't seem to make it work; too much 'guanxi' or relationships get in the way. The property bubble is very real; it's just a matter of time before it bursts. I find it striking that the Chinese are said to have 'long memories.' When it comes to investing, I am not quite sure: Witness the carnage in the real estate market in China in the 1990s. Watch out below?"

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Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.