Stocks are cheap but can go even lower
Associated Press
NEW YORK
Someone is about to play the fool — Wall Street analysts or investors.
For months, analysts who write reports praising or panning stocks have been saying they were cheap. Investors were unconvinced, buying one day, selling the next. Last week, they mostly sold, and stocks got cheaper yet.
The Dow Jones industrial average rose slightly Friday but closed the week down 6.4 percent, its worst showing since the depths of the financial crisis three years ago. In the broader Standard & Poor’s 500, the selling pushed down all variety of stocks — sexy high-techs and staid utilities, risky small companies and cash-rich big ones.
Stock prices compared with expected profits are now nearly as low as they were in March 2009, a 12-year nadir that marked the beginning of one of the greatest bull markets in history.
Have investors sold too much, as they did back then?
“I’d be buying the market,” says Citigroup’s chief U.S. strategist Tobias Lev-kovitch, who warned that prices were too high in the spring. Says Harris Private Bank’s Jack Ablin, who sold $6 billion or so of stock in August, “We’re sharpening our pencils to figure out when to get back in.”
Who’s right — or who’s about to play the fool — may turn on earnings, or rather, analysts’ estimates of how fast they will grow.
Recently, they’ve been cutting them for companies in the S&P 500 as fears of another recession spread. But they’re still predicting they will earn 13 percent more earnings in the three months through September than they did in the same period a year ago, according to data provider FactSet. That would mark the eighth- straight quarter of double-digit gains. And for the full year, analysts say earnings will hit a record.
“You can toss [those estimates] in the garbage,” says Peter Boockvar, equity strategist at brokerage Miller Tabak & Co. “Will Greece go bankrupt? What will be the extent of the global economic slowdown? I can’t get that out of an analyst report.”
If history is any guide, more cuts from analysts are coming.
One ominous sign: Those who changed their estimates this month chose to cut them more than six out 10 times, according to Citigroup. Early last month, raised estimates outnumbered lowered ones by nearly the same ratio.
Analysts are easy to bash. They usually tend to be far too optimistic, cheering on stocks long after they’ve headed down. Now they want us to believe that companies can continue making record profits in the face of falling housing prices, tight-fisted consumers, sputtering U.S. growth and a European debt crisis that is pushing a crucial market for U.S. exports closer to recession.
But it’s worth remembering that it’s been the naysayers, the investors, and not the optimistic analysts, who’ve mostly been wrong lately.