Yesterday we examined Bloomberg's recent article on the similarities between today's S&P 500 P/E levels and those of the Reagan era. We explored the opportunity to buy discounted stocks and discussed analyst predictions that the economy will recover, albeit slowly.
Today we revisit the topic with a more contrarian outlook.
Barry Ritzholz of The Big Picture thinks Bloomberg leaves out a few key factors in their slightly upbeat outlook for America's stock markets.
Firstly, Ritzholz points to overestimated earnings growth. Analysts have a history of overestimating growth by a significant margin, perhaps in response to a "if we wish for it hard enough" mentality. If future earnings growth was lowered, P/E's would seem cheaper, but it would more accurately reflect an ongoing deflationary economy.
Secondly, the impact of recession on earnings hasn't been properly accounted for. Bloomberg cited that a 22% drop in earnings would be necessary to put P/E ratios back on track to the 16.4 50-year average. "Indeed, that line of thinking ignores the overhang of housing, the deleveraging consumer, and tight credit conditions -- all of which could easily persist for years to come."
Faced with falling asset prices and "an unwillingness for investors to buy up for a dollar of earnings," perhaps the S&P 500 isn't so cheap after all -- only deflating. The market, according to Ritzhot, is littered with falling knives.
Is Ritzholz's take on Bloomberg's article more your style?
To help you identify some potential value traps in the market we list stocks below that appear undervalued by price to earnings (under 15), but for which there may be good reason.
All the stocks in the list below have experienced increases in short interest over the past month. Because short-selling requires borrowing, an individual or institution must meet several requirements (including background checks) to engage in short-selling. Thus, in general, short-sellers are more sophisticated than the average investor.
Do you think these names are falling knives? (Click here to access free, interactive tools to analyze these ideas.)
1. Lexmark International
2. Cephalon
3. GameStop
4. Moody's
5. Ball
6. Pitney Bowes
7. Amphenol
8. Lockheed Martin
9. Computer Sciences
10. Peabody Energy
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Becca Lipman does not own any of the shares mentioned above. Short seller data sourced from Yahoo! Finance. All other data sourced from Finviz.