Despite reporting record profits, market valuations for U.S. equities have been well below its 50-year average for one of the longest periods since 1973, reports Bloomberg.
Anxious investors
Of the $37 trillion erased from global equities in the credit crisis, $24 trillion has been restored, reports Bloomberg. But it has taken a long time to get even this far, and investors are still discouraged.
"After two significant bear markets, the flash crash and the lost decade, many have simply said, 'No mas,'" said Howard Ward of Gamco Investors in an email on Jan. 24. "Of course, bull markets have a history of climbing a wall of worry. And it is happening again."
Sunny skies ahead?
The Standard & Poor's 500 index is now trading at 13.7 times profit. This is well below its mean ratio of 16.4, a number it hasn't traded above in 446 days.
Bloomberg refers to the decline as "part of a decade-long retreat in U.S. equity valuations since the S&P 500 peaked at 31.2 times earnings in December 1999."
But a quick history lesson may encourage investors to take note:
"The last two times the S&P 500 slumped below its historic average, equities rallied. The benchmark index is up 42 percent since it climbed above the five-decade mean in June 2009. It spent 14 months below the average level from August 1988 through October 1989 before quadrupling within eight years starting in October 1990."
Business section: Investing ideas
Interested in finding companies that might be set to rebound if valuations rise?
For investing ideas, we created a universe of companies undervalued by their PEG ratio, choosing stocks with PEGs between .7 and 1.
Then we searched for signs of a rebound by looking at short-seller trends. All of the companies listed below have seen a decrease in shorts, or short covering, month over month.
Since short-sellers make money when a stock's share price drops, short covering signals that short-sellers are feeling more bullish about these companies.
What do you think? (Click here to access free, interactive tools to analyze these ideas.)
1. IPC The Hospitalist Company: Provides hospitalist services in the United States. Shares shorted have decreased from 2.71M to 2.06M over the last month, a decrease which represents about 4.08% of the company's float of 15.95M shares. PEG at 0.98.
2. Rogers: Rogers Corporation manufactures and supplies a range of specialty materials and components worldwide. Shares shorted have decreased from 988.90K to 826.92K over the last month, a decrease which represents about 1.02% of the company's float of 15.84M shares. PEG at 0.98.
3. Ebix
4. World Acceptance: Engages in small-loan consumer finance business. Shares shorted have decreased from 2.11M to 1.93M over the last month, a decrease which represents about 1.75% of the company's float of 10.31M shares. PEG at 0.94.
5. Valassis Communications: Operates as a media and marketing services company primarily in the United States. Shares shorted have decreased from 9.48M to 8.99M over the last month, a decrease which represents about 1.23% of the company's float of 39.71M shares. PEG at 0.84.
6. CACI International
7. Neutral Tandem
8. Portfolio Recovery Associates: Provides outsourced receivables management and related services in the U. Shares shorted have decreased from 2.50M to 2.33M over the last month, a decrease which represents about 1.02% of the company's float of 16.70M shares. PEG at 0.77.
9. Iridium Communications
10. Textainer Group Holdings
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 Rebecca Lipman does not own any of the shares mentioned above.
