Market’s expensive, but invest away

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 J.P. Morgan illustrates the point. One year after the market hits an all-time high, the average total return is 14.6 percent. That compares with 11.7 percent if you invest on any random day.

Go out three years, and the picture is similar. The average three-year return is 50.4 percent. Investing on any random day gives a three-year return of 39.1 percent.

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.

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), a property-and-casualty insurance company, has been gaining market share from rivals. 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 and to a richly valued market.

Over the past decade, it has grown its sales at a 12 percent annual clip.

D.R. Horton is the largest U.S. homebuilder, selling homes at almost all points. New home purchases ran hot during the height of the pandemic.

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.

Fox (FOXA) owns Fox News and Fox Sports and 28 television stations. You may like the conservative Republic 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. Some people are terminating their cable service, 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.

Finally, I recommend Cooper Companies Inc. (COO), one of the largest U.S. manufacturers of contact lenses. It also makes obstetrical and gynecological products, including the Paragard IUD.

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. I believe that’s why Cooper shares go for nine times earnings.

But if it goes as these things usually do, it will be settled for a substantial but not crippling sum.

Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes.