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Large Caps Cheapest Since 1951 at Trader’s Narrative

Large Caps Cheapest Since 1951

Just as with the late 2008 and early 2009 period when we had experienced and successful money managers come out of the woodwork to buy equities, we are seeing a growing list of them coming forward to cite the current valuations as attractive.

In a recent note to investors, the legendary investor Bill Miller (of Legg Mason) is citing the current market as providing a “once in a lifetime opportunity” to buy cheap large cap US stocks:

U.S. large capitalization stocks represent a once in a lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951.

Miller mentions Exxon Mobil, a high quality company being tarred along with the rest of the large oil companies, and Kimberly Clark with a 4% dividend rate (8% dividend growth rate) plus a share buyback program, etc. Another favorite is IBM as he explains in this video from the 2010 Morningstar Investor Conference:

Turning to the general market, he suggests using the financial sector as a tell:

If financials begin to act better, the market should follow; and if they languish, or decline further, then the market is likely to do no better.

We’ve already heard Jeremy Grantham (of GMO) repeatedly mention his preference for US high quality stocks. In his latest quarterly letter, US high quality stocks are the best asset class with the highest forecasted annual rate of return (7.3%) for the next seven years.

According to Leuthold Group, another well respected value investor, large caps (more than $8.4 billion) have a P/E of 13.6 compared to small caps (between $255 million to $1.3 billion) which have a P/E ratio of 16. This discrepancy in valuation is the largest since the firm began tracking it in December 1982.

Lowry Research
Checking in with Lowry, they are continuing to be optimistic and awaiting for price to confirm their expectations for a continuing cyclical bull market. They are basing their bullish outlook on the breadth measures such as cumulative Advance Decline lines which remained well above their February lows, even as they did fall from the April highs.

As well, their proprietary measures of demand and supply are supportive of higher prices. While the S&P 500 has fallen from its April highs, the Lowry Selling Pressure index has also declined. And from late May 2010, the Buying Power index has climbed higher.

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