Where is this Market Headed?

Courtesy of David Brown, Sabrient Systems and Gradient Analytics

Today’s major indices ended in the black, and we believe the market is more likely to continue to go up than down over the remainder of the year. That said, the market is being buffeted by a number of strong headwinds. 

The Syrian crisis tops the list, with the expected outcome changing almost hourly. Surprises have been frequent. The British decided against involvement. President Obama decided to go to Congress.  Congress is waffling as usual, but Obama is getting a little more support than initially expected.

War is never a good thing, but markets usually acclimate rapidly to the reality of whatever occurs. 

Congress is returning from the Labor Day weekend to the economic issues weighing even more heavily over the market. Where will the debt ceiling go?  Who will replace Bernanke? Can Congress and the administration together manage our economy? 

But despite all the chaos and problems, money must go somewhere. We know that long-term interest rates will continue to rise over a significantly long future. Managing that transition is the highest concern of the President, the Fed, and the Congress. With bonds falling, money will surely flow, at least to some degree, more to equities and less to fixed income. Corporate America in the aggregate has a war chest of cash to invest in growth and will do so because that is what businesses are built to do.  Economic numbers, while far from robust, continue the inexorable but slow, steady pattern of recovery. Every week we see new signs, albeit smallish ones, that the recovery continues. 

A key fact is that corporate valuations are modest, especially in light of corporate liquidity. Certainly, we are not at any kind of bubble valuation, unless it is in valuations of social media stocks; and many argue that even those are not too high. We may disagree with that view, but there is clearly growth opportunity in that sector.

Is that growth overvalued?  That’s the real question, but why go there? There are sizeable numbers of reasonably priced growth companies that represent a much better risk-to-reward ratio that the popular social media stocks. Go where rising bond yields will help, not hurt. Go where it is less likely that inept decisions on Capitol Hill will create havoc. Seek out the best opportunities to take smaller risk but get better-than-average returns. Like this week’s four stock ideas.

Here are last week’s market stats.

4 Stock Ideas for This Market

All four selection this week are mid-cap stocks with recent solid upgrades, positive earnings surprises for the past several quarters, and steady earnings growth at attractive prices.

 AmTrust Financial Services, Inc. (AFSI) – Financials Sector

AFSI underwrites and provides property and casualty insurance in the United States and internationally. Earnings growth for next 5 years expected to be 15% per year with a forward P/E ratio of 10.21.  Price when selected on September 3, 2013: $35.83.  Website: www.amtrustgroup.com

Trinity Industries Inc. (TRN) – Industrials Sector

Trinity provides products and services to the industrial, energy, transportation, and construction sectors primarily in the United States, Canada, Mexico, the United Kingdom, Singapore, and Sweden. Earnings growth for next 5 years expected to be 10% per year with a forward P/E ratio of 8.98.  Price when selected on September 3, 2013: $42.37. Website: www.trin.net

Portfolio Recovery Associates Inc. (PRAA) – Industrials Sector

PRAA is a a financial and business service company engaged in the purchase, collection, and management of portfolios of defaulted consumer receivables in the US and UK.  Earnings growth for next 5 years expected to be 14.25% per year with a forward P/E ratio of 13.84.  Price when selected on September 3, 2013: $53.14. Website: www.portfoliorecovery.com