In July I wrote about investing in an overvalued market under the estimate that an 18,500 DJIA would be the peak of the current bull market, ushering in a correction. In hindsight, this equities market would beguile us into even further overvaluation for several more months, continuing today. Anyone looking to buy in these market conditions really needs to think twice. I reiterate my estimate that the market is grossly overvalued and will undergo a 15-20% correction in the next 6-12 months. However, a curious investor is always on the lookout for opportunities in any market condition…
NKE ($50/share): “Just do it” probably isn’t the best motto to live by if you’re a prudent investor. But NKE is a steal at $50/share. As the DJIA, S&P500, and every index you can find posts all-time highs, the athletic shoe and apparel titan has quietly dropped 25% this year, and I find its current valuation of ~$50/share attractive. NKE has posted quarterly earnings growth of 15%, which is meaningful for an $85 billion blue chip. Trump proposes to decrease federal income taxes, plausibly leading to an increase in consumer discretionary spending, likely boosting NKE’s revenues. Hold onto NKE for at least a few quarters to see results as it rebounds from a lackluster 2016.
Risks to NKE: I see this as a medium risk investment. Where are we in the consumer spending cycle? The market has been propped up in part by consumer spending in 2016, and if the consumer pulls back in 2017, NKE could suffer. However, consumer spending could just as likely increase. Given these market conditions, consumer spending is an unknown, and a relevant risk to an investment in NKE.
CAT ($96/share): Caterpillar Inc. While the specifics of Trump’s economic plan remain vague until he appoints all of his advisors and his administration takes office, it is likely that the president-elect will depend upon infrastructure spending to revitalize the American economy. This investing rationale is simple: increased infrastructure spending means greater demand for building equipment. I like CAT because the stimulus in 2009 following the Great Recession promised increased infrastructure spending, and CAT tripled in value over the following two years. Even with high expectations, the stock outperformed. Look to own CAT for 18-24 months to see substantive returns. Did I mention CAT pays an attractive 3.25% dividend yield?
Risks to CAT: This is a high risk opportunity. The stock is trading very close to a 52 week high, and the PE is in the 50s, suggestive of a potential overvaluation. However, I believe the best is yet to come from CAT, and fundamentally strong demand will fuel the stock into 2017. This would not be the first time CAT has lived up to high expectations…
Tech & Healthcare: Trump’s election victory boosted several sectors, but not healthcare and tech. Healthcare titan Merck has fallen 9% since the election, as the market has conversely risen. Tech is also trading below 52 week highs since early November. While I reiterate my opinion that the markets are broadly overvalued, there may be opportunities in these sectors that I predict will not be as impeded by Trump’s presidency as people expect…
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Nice report! I also like Nike. I’d be interested to hear what you think of CWH?
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Thanks for the comment! I’m not familiar with CWH, looks like they had an IPO in early October. They specialize in RV sales, and we saw the auto industry have a better-than-expected November… not sure what the implications of that are on the RV segment. I’ll watch the stock and see how it moves considering its recent IPO