Jan 14 2020

Best cheap stocks to invest in 2019

Best cheap stocks to invest in 2019-Best cheap stocks to invest in 2019
Best cheap stocks to invest in 2019-For those who read my column on a regular basis, you may remember that in August 2011, I predicted that

Rochon: A prediction of even better times for the Dow Jones

François Rochon, Special TO THE GAZETTE 07.14.2014

MONTREAL — On July 3, the Dow Jones Industrial Average reached a record level of 17,068. For those who read my column on a regular basis, you may remember that in August 2011, I did something I do very rarely: I made a prediction. I wrote that I believed the Dow Jones would climb to 17,000 within five years. At the time, investors were worried about Greece and the fate of Europe. The Dow Jones had just fallen 12 per cent to 11,280 when I wrote the article. Stocks were cheap and the recession of 2008 had been over for almost two years. Fundamentals were solid and valuations very low. That is a great combination.

I don’t like making predictions, since I know that in the short run the stock market can be very irrational and unpredictable. Of course, Wall Street has no shortage of fortune tellers. The reason is simple: Even if you’re wrong half of the time (the same probability as predicting a coin toss), you can make money by selling your advice. Most Wall Street clients are thirsty for predictions, since they want to invest in the stock market for its potential rewards without living through the normal — and sometimes quite wide — fluctuations inherent in the activity.

The good news is that in the long run, the market filters the noise and adequately reflects the underlying value of companies. So, in the end, the market is rational and just: You can base your analysis on sound principles. But the time parameter is unknown; it can take five weeks or five years for a stock to be properly valued by the market.

So I predict the direction of the stock market very rarely (to my best knowledge, on four occasions in 21 years). I do it only when the odds are widely in my favour. In fact, the key to intelligent market investing is to have a margin of safety, as Benjamin Graham wrote some 65 years ago in his famous book The Intelligent Investor. In 2011, the price-to-earnings (P/E) ratio of the S&P 500 and the Dow Jones was around 12 times. In addition, the overall investors’ mood was greatly depressed. So I wrote then: “No one would dare to expect 15 per cent a year from stocks. Believe it or not, this is highly positive for long-term investors.”

Now that the index is up 50 per cent in less than three years, the main question I hear from clients is: What’s next? “Next” has been the same for me since 1993: to own great businesses acquired at attractive prices. When you keep your eyes on fundamentals (what’s happening to the company, not the stock), you can make proper long-term decisions. You won’t be right all the time, but being right two times out of three is enough to obtain good results.

Let’s go through a fresh outlook of the stock market potential for the next five years. The Dow Jones now trades at 15 times the estimated earnings of its 30 components. I believe that the earnings of the Dow companies will grow from five to seven per cent a year. This will bring the Dow’s estimated earnings of 1,120 in 2014 to a range of 1,429 to 1,571 by 2019. At that time, the average P/E for the Dow should be in the range of 15 to 17 times. So that would translate to a range of 21,441 to 26,705 points for the Dow in 2019. That is not precise, I’ll agree. (I might add that those who use precise calculations on the stock market don’t understand the principles of uncertainty.) Still, if you include an average annual dividend of two per cent, it brings the potential total annual return for the Dow Jones to a range of seven to 12 per cent. This is not that bad considering the alternatives: need I remind readers that U.S. five-year treasury notes yield 1.64 per cent these days?

As you all know, I think you can even earn better returns than the index by selecting solid companies that trade at attractive levels in the stock market. For the last four years, I’ve gone through many examples. But my main message today is that you should not listen to those who think the stock market is overvalued even after its recent climb. There is no fundamental reason to believe so, in my opinion. Of course, the stock market can go down in the short run. (Remember, it’s irrational and unpredictable.) But by 2019, I am quite confident that stocks will be much higher and will have outperformed fixed income assets by a wide margin.


Best cheap stocks to invest in 2019


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