Dow 11,000: Opportunity or Threat?

An admission: I'm a long-term buy and hold investor who knows better, but I still check my portfolio roughly 15.4 times a day. More often when the stock market's surging.

With the Dow at 11,000, Yahoo! Finance loves me. But as we all know (or should know), 11,000 is just a number. It should not spur any rash trading one way or the other.

To make the most of this arbitrary market event, I asked three of my fellow analysts for some advice for individual investors at these stock price levels.

Morgan Housel, Fool contributor: These milestones are generally meaningless, but I still think the market at these levels provides more opportunity than threat. The S&P 500 is on track to earn about $83 this year, and an estimated $94 next year. With the index at 1,165, I don't know where the overvaluation anxiety comes from. We're talking broad market multiples of 12-14, which should qualify as somewhere between cheap and reasonable -- with room for error. At the individual company level, high-quality companies like Microsoft (Nasdaq: MSFT  ) and Procter & Gamble (NYSE: PG  ) trade at valuations that shouldn't make sense to rational people.

My feeling is that the market's surge since the lows of March 2009 simply has many investors asking, "how is this increase justified?" They see a 70% market increase at a time when the economy looks like a cesspool, and it just feels wrong. But focusing only on the increase is misleading. The important question to ask is, "was the depth of the market crash justified to begin with?" I don't think it was. Look, corporate profits are at an all-time high. Nominal GDP is at an all-time high. Personal spending is at an all-time high. The long-term drivers of the stock market aren't doing as bad as some imagine.

Alex Dumortier, CFA, Fool contributor: Yes, last week the Dow crossed 11,000 for the first time since early May; however, it would be very difficult to argue that higher stock prices are now an opportunity for anyone who is a net buyer of stocks -- which I expect is almost everyone reading this.

Still, I will say that the blue-chip Dow index represents almost certainly a better opportunity than the broader market S&P 500, as the following table suggests:

Fund

P/E Multiple

Dividend Yield

3-5 Year EPS Growth

SPDR S&P 500 (NYSE: SPY  )

13.8

1.89%

10.7%

SPDR DJIA ETF (NYSE: DIA  )

13.2

2.69%

9.1%

Source: State Street Global Advisors website.

At a cheaper multiple, I'll take the extra 80 basis points in dividend yield of the Dow ETF over the 160 basis point advantage in estimated earnings growth for the S&P 500 ETF any day of the week -- something about birds, hands, and bushes.

Investors who have the time and the ability can earn yet better returns from stockpicking and, given the underpricing of high-quality companies, the Dow components make a good shortlist from which to begin one's search (legendary investor John Paulson likes and owns at least three).

Matt Koppenheffer, Fool contributor: I don't pay a whole lot of attention to the Dow. The index contains all of 30 stocks, and it's really tough to get a good feel for what's going on in the massive U.S. market based on that small number.

Past that, it's meaningless to focus in on a number like 10,000, 11,000, or even 111,000. It looks nice in newspaper headlines, but the price level of an index is only noteworthy when looked at in the context of the profits produced by the companies in the index.

When I focus in on something more meaningful -- like the S&P 500's current price-to-earnings ratio of 16.6 -- I'd say that it's hard to peg the overall market as being particularly cheap or expensive. But I consider myself a stock-picker and I'd say that there are certainly opportunities for investors to find great individual stock opportunities in this market.

The great thing is that a lot of the market's current opportunities are high-quality, dividend-paying, blue chips. Intel's (Nasdaq: INTC  ) stock, for example, is currently sitting at a forward P/E of just 10.6 and is paying a 3.2% dividend. Chevron (NYSE: CVX  ) has a forward P/E below 10 and a 3.4% dividend. It doesn't take a whole lot of brain busting to figure out that these are top-notch companies, so when I see these kinds of valuations, I'm all over them.

For some more individual stock ideas, click here for a free report detailing five stocks the Motley Fool owns.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Anand Chokkavelu owns shares of Microsoft. Intel and Microsoft are Motley Fool Inside Value selections. Chevron and Procter & Gamble are Motley Fool Income Investor picks. The Fool owns shares of and has written covered calls on Procter & Gamble. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Intel, and Microsoft. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 11, 2010, at 7:32 PM, KLIPDOG wrote:

    Let's remember that even though the stock market is at 11,000, it is only because the dollar is loosing value. For more info on this see the Cloward and Piven strategist's, umm, I mean President Obama's monetary policies and you'll begin to understand our dollar is being horrifically debased. If anyone thinks that dollar weakness is not the reason for the 11,000 number then please share your ideas.

  • Report this Comment On October 11, 2010, at 7:51 PM, cdubonmf wrote:

    "I'm a long-term buy and hold investor who knows better, but I still check my portfolio roughly 15.4 times a day. More often when the stock market's surging."

    LOL...me too. Guilty as charged.

  • Report this Comment On October 11, 2010, at 9:48 PM, BearishKW wrote:

    "If anyone thinks that dollar weakness is not the reason for the 11,000 number then please share your ideas."

    Positive earnings, gradual recovery, eventual clarity

  • Report this Comment On October 12, 2010, at 1:00 AM, joandrose wrote:

    Dollar weakness has to have a significant effect on the valuations of US equities. Also bear in mind that when a number falls by 33 percent (say a stock price) it has to rise by 50 percent to come back to parity. If the Dow goes up by the same percentage as it fell - it is still down. The Dow at 11000 is no big deal !

  • Report this Comment On October 12, 2010, at 3:55 AM, garifolle wrote:

    " ... but I still check my portfolio roughly 15.4 times a day." LOL me too!

    " More often when the stock market's surging."

    I wouldn't call today's session (Monday Oct.11), as surging!

    I think that most investors have heard the numbers... and they are scared, as I am too.

    My reply to your title question? A threat!

    All indices had a hard time to finish slightly higher, on less volume.

    Oct. 5Th surge on huge volume gave to think "OK, there might be no second-dip".

    But it was all on the hope the FED would do something. But what could the Fed do really?

    About the dollar weakness, I think one should see that as positive (for the American exports).

    I am Canadian, and we really do not appreciate our currency going up because our economy relies mostly on exports.

    But as long as the US economy depends so much on consumers, the light at the end of the tunnel is very very weak.

    The Americans have learned the lesson about living over their means.

    Even if jobs went up a lot, they will pay their debts and SAVE.

  • Report this Comment On October 12, 2010, at 5:34 AM, daveandrae wrote:

    An investor should always be asking the basic question "how much do want for the whole thing?"

    For example, if you had 95 billion dollars, would you buy not some, not most, but ALL of the Hewlett Packard company?

    This makes investing remarkably simple. For if the entire business is worth buying, then you should be buying as many shares as you can afford. It should matter that the "market price" is 41 or 38, that the dollar is weak, or strong, that it is Thursday, July, or that the Dow is trading at 11,000 or 10,000.

    The only thing that should matter to you, as an investor, is whether or not the business is going to keep generating more and more cash over time. If that answer is yes, then selling should not make sense to you.

    The original owners of the Coca Cola company sold out for 2000 bucks in 1919. Today, the business is worth over 143 billion. I bought as much McDonalds for 13 bucks a share back in 2003 as I could afford. Over the next 12 months, this business is going to pay me 2.44 in dividends. Now why would anyone in his right mind ever sell a business like that?

    On the hand, if the entire business is not worth buying, why purchase even one share of the company's stock?

    Thomas Edmonds

  • Report this Comment On October 18, 2010, at 1:37 AM, ChrisBern wrote:

    Two comments on Morgan's comments:

    (1) "The S&P 500 is on track to earn about $83 this year, and an estimated $94 next year." I'm guessing that you're citing an industry-estimate here and not one that you calculated yourself, but since you're citing it, what leads you to believe earnings will grow almost 14% next year? That seems aggressive to me, especially considering we're sitting at historical earnings highs.

    (2) "I don't know where the overvaluation anxiety comes from." I wouldn't necessarily call it anxiety, but measures of overvaluation come from reliable measures such as Shiller's CAPE, which is a significantly better type of P/E ratio to extrapolate valuation from than TTM or projected operating earnings. CAPE shows the market at somewhere around 25% overvalued right now. Is the economy and the state of business in general 25% better than it's been on average historically? Not in my book...

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