Thursday, March 16, 2006

Cautious on Stocks, but Opportunities Remain

Although I'm more concerned about an overvalued housing market, I'm often asked if the stock market is also overvalued. It's certainly no where near as overvalued as it was in early 2000. Yet I still have a cautious outlook for both the economy and the overall stock market. However, some stocks are performing exceptionally well; and the Forbes Growth Investor Top 50 recommended list is up almost 12% year-to-date.

For example, Sirenza Microdevices (SMDI) is up more than 60% since I added it to the recommended list on Jan. 12. This is a small ($300 million market cap) company that only recently began reporting profits. Yet management keeps revising higher its revenue and earnings projections.

Wesco International (WCC), an electrical construction products provider, is a much larger company ($3 billion market cap) that has almost quadrupled in value since it made it to my recommended list almost two years ago. Yet it's still selling for only 0.7 times sales and about 19 times expected 2006 earnings.

While I remain skeptical of the market's recent rally--especially in the face of $60 oil, an inverted yield curve, rising housing inventories, a negative savings rate, higher levels of personal debt, and only meager gains in real net worth--I still think it makes sense to look for promising investment opportunities.