Steve McDonald: Hi, everybody. I’m Steve McDonald. This is your Market Wake-Up Call. Our guest is the Alex Green, our very own three-time best-selling New York Times author, Chief Investment Strategist for The Oxford Club and the best stock picker I’ve ever known. He’s here to talk about what to buy and own in what he thinks is an overpriced market. Welcome, Alex. Alex Green: Hey, Steve. How ya’ doin’? Steve McDonald: Well, I have to be honest. I’m surprised to hear you calling something overpriced. I’ve never heard you say anything like that. Alex Green: Well, there are things that deserve to be a little pricier and things that don’t. Steve McDonald: Now the S&P 500’s P/E is about five points over its long-term average of 16. That’s a P/E of 21. Historically speaking, we’re sitting on pretty expensive stocks. How did it jump five points in just a few months? Alex Green: Well, the way it happened is, I should begin by saying that the market’s average P/E for the last 50 years has been about 16. Stocks trade at about 16 times trailing earnings. Right now, the market’s P/E is slightly above 20. Now, there are two reasons why this has expanded in recent months. One is that stocks are a little higher than they were six months ago, and the other is that earnings are a little lower. That’s expanded the multiple. Why are they lower? Because we’re in what’s called an earnings recession. Now, everybody knows that an economic recession is two consecutive quarters of negative economic growth. An earnings recession is two consecutive quarters of negative corporate profit growth. What’s happened is, not that all earnings have come down, but in one particular sector, energy, oil and gas, prices have come way down and so have earnings, and that has affected the earnings for the total S&P 500. So that’s why we have two consecutive negative quarters of earnings. Otherwise earnings would still be ticking higher. Steve McDonald: So is this a sell signal? Should we be going to a larger cash position? Alex Green: No, it’s not. What you should do is stop thinking about the stock market and start thinking about a market of stocks. Within the market, there are plenty of sectors that are actually somewhat undervalued. Talking about financial services, communications, biotechnology... The key is not to be thinking about the market as a whole, but where in the market can I find value. Where do I find stocks that are inexpensive relative to sales, relative to profits, relative to return on equity and relative to future business prospects, near-term prospects? Because those companies that exceed expectations by the widest margin are going to be seeing the biggest jumps in their share prices. So look for value where it can be found in this somewhat pricey market. Steve McDonald: Which part of the market right now do you see as the most attractive? Alex Green: Actually there are bargains in almost every sector. Some of the sectors that look expensive are actually not necessarily so. Let’s go back to energy for a second. The P/Es on those stocks look higher than average, but why? Because the earnings just took a huge drop. A lot of companies even reported negative earnings, but going forward, since oil’s rebounded from just over $26 a barrel to more than $50 a barrel, we know those earnings will be much, much better. So what looks like a high P/E is actually just the market recognizing that these companies are likely to see a big boost in profitability. So I’m finding bargains in energy. I’m finding bargains in financial services. Biotechnology has sort of a dark cloud over the sector because both the leading presidential contingents have promised to “do something” about high drug prices. Since nobody knows what that is, that’s a cloud over them. But we know that miraculous developments are taking place in pharmacology and that these drug companies have pipelines full of very promising drugs, and earnings going forward are likely to be much better than expected. Steve McDonald: So you like the oils - even though their P/Es look high because their earnings are actually just too low - and pharmaceuticals. Both sound like very good picks. Alex Green: Well to clarify, I don’t like energy companies, for instance, that are highly leveraged and don’t have the capital structure they need to make it through a tough period for energy prices. But for sound companies with plenty of cash, not a lot of debt and without hedge production, yes. There are some great bargains in that sector. Steve McDonald: That sounds fantastic. Thank you so much for being with us today. Alex Green: Thanks for having me, Steve. Steve McDonald: It’s my pleasure. For everybody here at the Market Wake-Up Call, I’m Steve McDonald. Thank you for being a part of us. We’ll see you next week. [End of Audio]