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Random market thoughts

While running a simple screen for Cheap Growth stocks, I had something unusual happen. There was not a single stock that met the criteria. That's right, zero, zilch, nada. The screen only had three criteria; a PEG ratio of .75 or lower, a debt to equity ratio of .8 or lower, and an expected growth rate of 25% for the next 5 years. Only two possible conclusions can be drawn from this. Conclusion A, growth stocks are way over valued at this time. Conlusion B, analyst estimates for earnings growth are still very bearish, too bearish in fact.

My past experience with this screen leads to me too conclusion B. I started using this screen six months prior to the beginning of the bear market. At that time, there was no shortage of cheap growers. In fact I had to add a market cap component to reduce the number of possible candidates. Since the screen depends heavily on analyst earnings estimates and considering the events that occurred half a year later, I would conclude that analysts were too bullish at that time.

I realize that this may seem counterintuitive on the surface. If you look at it keeping two famous axioms in mind, it becomes much clearer. Sell when everyone is bullish and buy when everyone is bearish. I'm certainly not suggesting this is a full proof indicator nor a tool to time the market. But when used in conjunction with other factors it could prove to be useful.

My view at this time is that the current bull market has some legs left. I came to this conclusion not only using the screen, but also looking at economic indicators. The economy is growing according to GDP estimates for the past several quarters.

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Comments

  • Revisiting the screen...  There are five candidates populating the screen now.  That's still a far cry from the 100 or so that populated it in the previous bull market top.

  • Peter, I believe it's future P/E. Both are analyst estimates. So yes, it is dividing one abstraction by another. The screen's validity is questionable at best as a tool to find investment/trade candidates. While at one time, I used it for that purpose, I no longer use it. I have little faith in analysts. I have grown older and hopefully wiser. I believe the only valid use for this screen now is as a sentiment indicator.
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