Finding Value in a Fully Valued Stock Market.

We are stock and option traders and our criteria for securities to trade are simply under valued stocks.  When they are easy to find it is like shooting fish in a barrel. When they are difficult to find, like now, the risk of trading and owning stocks goes up and selecting values is paramount.  We trade 13 to 15 securities monthly and keep a list of stocks that counts in the lower 20's for our watch list.  So where are we finding values now? 

First off many stocks on our watch list we really really like, such as O, NNN, and BCE are just too richly valued for us to trade. Excellent companies with a long term future, but with PE's in the upper teens and above so there is downside risk especially in a market downturn.   We look for FORWARD PE's in the single digits to about 12x.  We also look for stocks that are $10 billion in market value and above and lastly want those PE's to be decreasing as the stocks move forward.   Those qualities take out much of the risk in say a 10% correction and provide safety going forward. 

So right now we see numerous values in the large banks and large insurance companies sectors.  PRU and MET are single digit PE's going forward.   Both are strong large cap insurance companies with recovering businesses that are not tied to health insurance long term concerns.  Large banks like JPM, which is our favorite, plus C and maybe BAC offer strong earnings growth going forward.   Insurance companies and banks will prosper nicely with the expectation of increased interest rates the next few years.   Higher rates, even a small move up, will produce significant increases in earnings for these companies with large holdings of loans and securities.    Almost any large insurance company looks good now, but the banks must be sifted through because there remains concerns about the Obama administration still using their profits for a election ATM. That is why JPM looks best right now as it basically past it's ATM moment.  

Some other stocks where we find some value is SO,  this large electric utility is not subject to as much negative regulatory action as other utilities.  SO also offers a depressed price and a good safe dividend.   AAPL, which is the midst of a new product cycle is still fairly priced and with the strong ownership of funds and large holders likely has little downside risk here.  We also like the sheer addiction Appleheads have to purchase any upgrade of this product no matter how small. 

CSCO, a large cap tech stock, is somewhat undervalued as well.  We expect the stock would go nowhere in a market sell off.   BP, which we traded for some time months ago, has now moved back into the upper $40's price wise and is selling a single digit PE for next year.  The oil price sell off has pushed back many of the big oils, but BP is the only one that looks like a buy at this price.  T has backed off in price due to concerns with pricing and competition and we believe has little downside here and lots of coverage for a 5% plus dividend. 

One little gem we found last month is NEWM, a small newspaper company, that we find significantly undervalued.  Yes the stock has some risk but pays about 6% dividend that seems well covered to us.  Since it is market capped at less than $1 billion dollars our fund can not trade it due to internal rules, but that does not mean you home gamers can not take advantage of the opportunity.  

  Lastly we continue to own and have added recently to NNC, a Nuveen North Carolina muni bond fund which is about 12% undervalued.  It pays right at a 5% monthly tax free dividend and eventually will recover it's full value we believe while paying the owner nicely while they wait.  NNC is our largest holding now.