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I want to be perfectly bullish on the stock market. I really do. But sometimes you have to accept the reality that's staring you in the face and accept that a full-on bullish charge is not the right move.
Don't tell that to stock permabull Jeremy Siegel. On Friday he was featured on Yahoo!'s Daily Ticker talking about why it's not too late to be bullish on the stock market as a whole. Siegel believes that stocks are cheap and that investors can expect attractive returns buying at today's prices.
But I'd be very careful following that advice.
Here's the problem
Don't get me wrong. I dig Siegel, and he's delivered a lot of good wisdom over the years. He's also simply a very sharp guy -- he's a professor at my alma matter, The University of Pennsylvania, and holds a Ph.D. from MIT. But he's made a name for himself largely through his bullishness on stocks and his book Stocks for the Long Run.
In this particular case, I'm concerned that his always-on bullishness is causing him to dismiss a warning flag way too lightly.
During the appearance on Daily Ticker, host Aaron Task asked Siegel about the fact that Yale professor Robert Shiller's cyclically adjusted price-to-earnings (CAPE) ratio -- which measures the market's current price against average earnings over the past 10 years -- suggests that stocks are expensive. Siegel responded by saying that the measure is misleading because financial companies such as Bank of America, Citigroup (NYSE: C ) , and AIG (NYSE: AIG ) registered massive losses during the financial meltdown that dragged total index earnings down an almost unprecedented amount during that stretch. The implication was that if earnings had fallen more in line with a "normal" recession that today's CAPE would look much more attractive.
The tale the numbers tell
The idea that Siegel is floating is easy enough to test. What I did was simply grab Shiller's spreadsheet (which he's kind enough to provide on his website) and replace those disastrous crash-era earnings numbers. During the post-dot-com recession, earnings fell a bit more than 50% from peak to trough, so I chopped peak 2007 earnings in half and replaced all of the 2008-2009 earnings results that were below that level with the new, higher floor.
In simple terms, this makes it as if, instead of a hellish, sky-is-falling earnings crash, we had a relatively average recession.
Directionally, the result is right in line with Siegel's view. That is, the CAPE multiple falls. The problem, though, is that it doesn't fall all that much. Based on the actual numbers, the current CAPE is 20.1, or 23% above the long-term average of 16.4. When using my hypothetical numbers, the CAPE drops to 19, which is still 16% above the long-term average.
So in other words, if we plug the gaping earnings hole in 2008 and 2009, the S&P 500 index as a whole is still expensive.
Heck, even if I go absolutely crazy and plug in 2007 peak-level earnings for the entire time since then -- making it as if the recession and financial meltdown never happened at all -- the CAPE measure would still show the S&P 500 as only fairly priced.
Much love, Jeremy
Even if I don't agree with him on this one, I'm still a fan of Siegel. One big reason for that is that he's an avid supporter of high-quality, dividend-paying stocks -- and I think there is still a lot of opportunity in that corner of the market.
That's right -- even though the stock market broadly isn't terribly attractive to me, there are quite a few individual stocks that I think are worth considering right now. The five that follow are great examples of exactly what I mean.
Current Trailing Price-to-Earnings Ratio
Price-to-Average 10-Year Earnings
|ExxonMobil (NYSE: XOM )||9.5||11.2||2.6%|
|General Electric (NYSE: GE )||12.2||10.4||3.8%|
|Intel (Nasdaq: INTC )||9||14.7||4.3%|
|Cisco (Nasdaq: CSCO )||13.2||14.2||1.6%|
|AstraZeneca (NYSE: AZN )||7.8||10.3||5.9%|
Source: Capital IQ, a division of Standard & Poor's.
Why are these stocks so cheap when the rest of the market isn't? Is it because the computing infrastructure around the world will suddenly stop using Intel chips? Is it because the massive dividend-adjusted performance of ExxonMobil's stock has been a fluke? Is it because AstraZeneca will never develop another blockbuster drug ever again?
I'm sure that you'll find some people that will answer "yes" to some of those questions. But the real truth is that the market moves in cycles, and at times investors want nothing but large-cap stocks, while at other times they want nothing to do with the big guys. During the decade ending in 2000, the advantage went to large caps as the Dow Jones Industrial Average (INDEX: ^DJI) significantly outperformed the small-cap Russell 2000. Over the past decade, though, the opposite has been true, as the Russell 2000 has outrun the Dow.
That has created some good news for investors. To find cheap, high-quality, dividend-paying stocks today they don't have to dig through small, relatively unknown companies because large, well-known companies are very attractively priced. Not quite convinced? Here are 13 more examples from my fellow Fools who think these are a bunch of stocks that you can buy today.