With the economy mired deep in recession, you'd be crazy to invest in a market selling at 20 times this year's estimated earnings, right? Alas, it seems crazy is exactly what we've got.

Yes we can ... be completely irrational
By the end of last week, 466 of the S&P 500-member companies had reported first-quarter 2009 earnings. Collectively, the group posted $10.09 per share in operating earnings. According to Standard & Poor's Economics Department, those quarterly results will improve only marginally throughout the remainder of the year. Thus, the S&P 500, trading in the 900 range, is valued at a 2009 P/E of more than 20.

The numbers only get worse. Notice that the above calculations use operating earnings, a non-GAAP metric that excludes one-time items such as asset value writedowns. Based on reported earnings estimates, S&P economists put the market at a loftier 2009 P/E of 31. Need some perspective? Toward the end of the 1973-74 bear market, the S&P 500 was kicking along at a trailing-12-month P/E of roughly 7.

As far as I see it, our current economic challenges outdo the oil crisis and high inflation of the 1970s, which leads me to believe that this keeps-on-going rally is more about force of will than a focus on fundamentals. But even though investing in the broad market looks pigheaded right now, don't assume that every stock out there will get you slaughtered.

CAPS your insight
I'm increasingly fond of using Motley Fool's CAPS investing community as a research tool. In order to zero in on stocks that are benefitting from steady/improving fundamentals, rather than mere market momentum, I used the CAPS screener to search for stocks that have maintained top four- or five-star CAPS ratings over the past few months, or better yet, have been upgraded from four stars to five. From the screen results, I've chosen the five stocks listed below, all of which are trading at about half of the market's 2009 P/E, based on the average analyst estimate listed on Yahoo! Finance.

Company

CAPS rating on 3/20/09

CAPS rating on 5/20/09

2009 P/E

Dividend Yield

Bristol-Myers Squibb (NYSE:BMY)

****

****

10.6

6.1%

Diana Shipping (NYSE:DSX)

****

****

10.1

N/A*

Forest Laboratories (NYSE:FRX)

*****

*****

6.7**

N/A

Sanofi-Aventis (NYSE:SNY)

*****

****

7.1

4.7%

Total SA (NYSE:TOT)

****

*****

11.1

4.8%

Data from Motley Fool CAPS and Yahoo! Finance on 5/20.
*DSX dividend is currently suspended.
** Current fiscal year for Forest Labs is 2010.

Of course, this table should be taken as a starting point for research, rather than a list of formal recommendations. On that note, I am immediately drawn to integrated oil giant Total, which has acquired a crowning fifth star from CAPS members.

Totally investable
Interestingly, Total's CAPS rating upgrade has coincided with crude oil's move from around $40 per barrel in March to a current price of $60 or so. 

But CAPS member jnkhunter recently offered an informative snapshot of the company that incorporates a long-haul outlook: "Good reserves, Outstanding E&P program, good dividend return, way undervalued. Petrochemicals is struggling and refining margins may be weak in the near future, but long term the company is well positioned to grow reserves and will remain a major player globally."

My fellow Fool David Lee Smith highlighted Total's superior first-quarter 2009 results compared to other integrated majors, along with its plans to ramp up production. Keeping the pedal to the metal should yield profits down the road; IEA International Energy Agency Chief Economist Fatih Birol sees "significantly higher [oil] prices" in the future, thanks to massive project cutbacks across the oil industry. I couldn't agree more, and Total's 4.8% dividend yield certainly encourages investor patience.

Do you need to be drugged to buy this stock?
Finally, let's take a look at the high-yielding Bristol-Myers Squibb. It seems that concerns about nearby patent expirations have combined with a fear of Obama-led health-care reform to make this entire sector a market pariah. Indeed, I've heard pundits say that investors should steer clear of any company that doesn't make health-care more efficient.

As an ultra-safe strategy, that makes sense. Meanwhile, the stocks of health-care information technology providers Quality Systems (NASDAQ:QSII) and Allscripts-Misys Health care Solutions (NASDAQ:MDRX) look pricey.

CAPS member sk8terman wrote a compelling endorsement of Bristol-Myers that includes some interesting thoughts on the overall sector:

Huge safe yield, great pipeline, plenty of cash. Pharma sector too beaten down even with the politics. Remember, so long as more people will be able to afford the drugs, the price can go down with the drug companies still making their huge profits. It costs them almost nothing to physically produce more pills. Obama is an intellectual, he will figure out a way to give incentives for change. As an example a few years longer on the patents in exchange for lower costs to consumers.

I tend to agree that the Obama Administration will not pursue reforms that destroy companies' incentives to develop new drugs. Still, Bristol-Myers' pipeline gives me pause: While it has plenty of potential winners in the works, it's unclear whether development-stage drugs will replace the revenue of blockbusters Plavix and Avapro, both of which lose patent in 2011. That said, the company's cost-cutting initiatives and $8.9 billion in cash and short-term investments should help bridge any gap between patent expirations and the next wonder drug.

Careful with that shovel
In the end, whether you're eyeing one of the stocks discussed in this article or any other reasonably valued gem, I encourage Fools to stay disciplined. It's tempting to chase market rallies, especially after periods of big losses. But instead of digging yourself out of a hole, you're liable to end up in a great big pit of crazy, trapped with all the other hogs.

Other Foolish takes on the rally:

Quality Systems is a Motley Fool Stock Advisor selection. Total SA is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak does not hold shares in any company mentioned. The Fool's disclosure policy prefers to rally on fundamentals.