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Why U.S. Stocks May Finally Be a Good Buy

It's never been clearer that ordinary investors just don't like U.S. stocks right now. While emerging markets like China and India grab the spotlight, you'd think from listening to news reports that investing domestically was just as bad as throwing your money away.

That negative sentiment has pushed investors out of the U.S. stock market and may well continue to do so. But for contrarian investors looking for great values, bad sentiment toward domestic stocks is the next best thing to a front-page cover story proclaiming the death of equities.

Taking turns
There's a certain irony in how far sentiment toward U.S. stocks has fallen. For years, you could hardly convince investors to put their money into foreign stocks at all. Concerns about political risk, as well as a simple lack of familiarity with global markets, made investors much more comfortable staying close to home.

But a decade of underperformance for domestic stocks has largely put an end to investors' reluctance to let their money leave America's shores. Even as large-cap U.S. stocks have suffered through a lost decade, many emerging-market investments have posted double-digit annualized gains. That has attracted performance-chasing investors who point to continuing strong growth in other parts of the world as a prime reason to avoid buying domestic stocks.

Invert your thinking
When the investing herd starts avoiding a particular sector, though, it's often a good idea to take a closer look. After a long run of outperformance, Chinese stocks' rally has begun to waver. Whereas the S&P 500 has continued to climb in the past two months, the iShares FTSE China 25 (NYSE: FXI  ) is down more than 10% since the beginning of November, as Baidu and other high-flying Chinese stocks have proven unable to maintain all of their big gains for the year.

Meanwhile, stocks within the U.S. have fallen to the point at which they're reasonably valued. Just looking at the domestic stocks with the largest market caps gives you a decent look at what valuations you can expect right now.

Among the biggest 10 U.S. stocks, AT&T (NYSE: T  ) , whose legacy landline business puts a damper on future growth, has an earnings multiple of just 8. It's the only stock in the top 10 with a single-digit P/E ratio, but energy giants ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) both have P/Es of 13 or less, as do tech stalwarts IBM (NYSE: IBM  ) and Microsoft (Nasdaq: MSFT  ) . Even Apple (Nasdaq: AAPL  ) , which has experienced extremely fast growth in recent years from the success of its new products, enjoys a trailing earnings multiple of just 21.5. If the iPhone maker's earnings continue to grow at their past pace, its P/E ratio could compress even further.

Where to focus
Of course, some investors are scared about stocks that focus too much on the U.S., arguing that economic growth will never be able to match the rapid pace found in emerging-market countries. With better growth-stock prospects elsewhere, they argue, sticking with international investments that have worked for years is the better move.

But those investors neglect to consider that U.S. companies are positioning themselves to benefit from emerging-market growth as well. Not only will you find companies like Yum! Brands building a strong physical presence in China and other international markets, but you can also look to companies that do a substantial part of their business abroad. IBM and Apple, for example, may be American companies, but their businesses are global. The health of the overall global economy is more important to them than conditions in their home country -- despite the substantial size of the U.S. economy compared to the rest of the world.

You can go home again
Even though U.S. stocks are finally looking more attractive, you should still maintain some positions in international stocks. But thinking that you need to dump U.S. stocks entirely is just as shortsighted as owning no foreign investments. With a healthy mix of both U.S. and international stocks, you'll ensure that your portfolio matches up well against the global economic environment.

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Fool contributor Dan Caplinger only hates investments that don't make him money. He doesn't own shares of the companies mentioned in this article. Baidu is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. Chevron is a Motley Fool Income Investor choice. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value selection. The Fool owns shares of Apple, ExxonMobil, IBM, and Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy knows there's no place like home.

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  • Report this Comment On December 30, 2010, at 8:36 PM, mountain8 wrote:

    I'm calling for an international boycott of ANY company, person, or entity of any kind that posts advertisements in these discussion blogs wasting all our time and ruining the sense of the discussions. I pay TMF to keep my sites commercial free. Live up to your side of the bargain.

  • Report this Comment On December 31, 2010, at 10:32 AM, PEStudent wrote:

    "..Invert your thinking.." This is something you do if you're not able to analyze a balance sheet or income statement then do some deeper research. Or perhaps if your a trader, not an investor. Otherwise you use much of the same tactics when evaluating investments for the long (hopefully a few years) haul.

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