What Now?

The market has had a tremendous run with the S&P 500 Index is up 50% from its March lows. I am not sure that anyone expected us to reach these levels so quickly—certainly not me. I was not surprised when the market bounced off its bottom, but the size of the move was surprising. While we are happy to have seen stocks recover so dramatically, it does beg the question, what to do now?

Rather than holding and hoping, we have sharpened our valuation pencils to see if at today’s prices we still want to own these stocks in our portfolios. We are finding some of our stocks look ripe for a sale. Given the market move, that should not be surprising. We do not view ourselves as traders, but instead are taking a much more pragmatic view of what we own. While we technically may be climbing out of a recession, things are still very weak, unemployment is high and spending is soft. Earnings for the quarter generally looked good, but most of the upside surprises came from cost cutting and that may or may not be sustainable. It is going to take awhile to get things back to “normal.” So that means, we need to consider that in our valuation of the companies we own. And right now valuations are starting to look a little too rich for some of our companies.

Don’t take this as a broad market call, it isn’t. Take it for what it is, the view of someone who believes some of his stocks are fully priced. And as opposed to getting too greedy, I am deciding to take some money off the table, in the belief that I can re-deploy it back into stocks at lower levels or into some stocks that have not participated in this rally.

While I don’t think there is anything wrong with this approach, there is the possibility that these sales could turn out to be too early. One way would be if the economy improves much more rapidly than I expect and rising earnings continue to drive stock prices up. While that is a possibility, we are going to need to see revenues rise and it just does not appear that is likely right away. Spending still appears soft.

Another way we could be viewed as early, is if we see the investors who have been on the sidelines for this advance start to aggressively buy stocks for fear of missing an even bigger move. This influx of cash could force stocks up further. This may occur, but if so, we are not be selling all of our stocks, so we will participate in any advance.