Clients and prospects often say to me, “With the market at all-time highs, isn’t this a bad time to invest?”
They are worrying about the wrong thing.
If you don’t invest when the market is at an all-time high, you will miss some excellent returns.
A study by JPMorgan (JPM, Financial) illustrates the point. One year after the market hits an all-time high, the average total return is 14.6%. That compares to 11.7% if you invest on any random day.
Go out three years and the picture is similar. The average three-year return is 50.4%. Investing on any random day gives a three-year return of 39.1%.
Over five years, the difference isn’t quite as dramatic, but still favors investing at all-time highs. The study covered more than 32 years, from the beginning of 1988 through Aug. 27, 2020.
Genuine worry
If investors shouldn’t worry about all-time highs, what should they worry about? The stock market is rich. Most stocks are selling at high multiples of their intrinsic value.
The intrinsic value can be measured by a company’s earnings per share, its sales per share, its book value (corporate net worth per share) or other measures.
By every measure I know, the market is expensive. The ratio of stock prices to earnings, for example, is 34 according to Barron’s Market Lab. That’s the highest I can remember, in the same neighborhood as at market tops in 1987 and 2000.
High valuations generally presage below-average returns over the coming five years. But they aren’t a great short-term signal. The market can stay expensive for quite a while, as it did, for example, in 1985 to 1987, until it crashed in October of 1987.
Short summary: All-time highs don’t worry me at all. High valuations keep me up at night.
Some bargains
In an expensive market, some stocks still appear reasonably priced. Here are four that I like.
Progressive Corp. (PGR, Financial), a property and casualty insurance company, has been gaining market share from rivals, partly with a barrage of quirky, humorous TV ads. The stock sells for only 10 times earnings.
Over the past 10 years, Progressive has usually sold for about 14 times earnings. So it’s at a discount to its own history, as well as to a richly valued market.
I think the stock deserves a better multiple. Over the past decade, it has grown its sales at a 12% annual clip, and earnings at about 18%. The latest results are even better.
D.R. Horton Inc. (DHI, Financial) is the largest U.S. homebuilder, selling homes at almost all points. New home purchases ran hot during the height of the pandemic, as people wanted uncrowded neighborhoods and space for a home office.
In the past four months or so, new home sales have cooled. Mostly likely it’s because home prices have risen fast, pricing some buyers out of the market.
The way I see it, the rising home prices are a sign of strength, not weakness, for homebuilders. I like a bunch of them, but Horton is my favorite. It sells for nine times earnings.
Fox Corp. (FOXA, Financial) owns Fox News and Fox Sports, as well as 28 television stations. You may like the conservative Republican slant of Fox News, or you may hate it, but it has given Fox news a well-defined identity.
The stock sells for 11 times earnings because investors have concerns. For example, some people are terminating their cable service or cutting back on it, getting more of their news from the internet. Also, TV networks are having to pay through the nose to get the rights to broadcast live sports.
Are these concerns legitimate? Yes, in my view. But that’s why the stock is relatively cheap, and at the present price (around $36 a share), I think it’s a good value.
Finally, I recommend Cooper Companies Inc. (COO, Financial), one of the largest U.S. manufacturers of contact lenses. It also makes obstetrical and gynecological products, including the Paragard IUD (intrauterine device for birth control).
Cooper acquired the Paragard from Teva Pharmaceuticals and both companies are involved in litigation from plaintiffs who allege that the product can fragment and lodge within the body when a doctor tries to remove it. I believe that’s why Cooper shares go for nine times earnings.
I claim no expertise on the litigation, but if it goes as these things usually do, it will eventually be settled for a substantial but not crippling sum.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
