Stocks Will Continue to Climb in 2013

Posted by D4L | Monday, November 05, 2012 | | 0 comments »

The price-to-earnings (P/E) ratio reveals how much investors are willing to pay for $1 of earnings. The most recent reading from our proprietary “P/E Finder” model indicates that the price to earnings ratio of stocks should be near 17. The P/E ratio is currently selling at 14.3 times earnings. Multiplying the model’s predicted P/E of 17 times the analysts’ 2012 earnings estimates of $105 suggests a year-end value for the S&P 500 of over 1700. That is nearly 20% higher than the current level of about 1400. In addition, our “Dividend Valuation Model” currently estimates that stocks are 15-20% undervalued based on the historical relationship between dividends and price. We feel this confirmation of two separate models measuring two different indicators both arriving at the same conclusion is convincing evidence that stocks are, indeed, undervalued.

On balance, we believe the stock market would do better under Mitt Romney than under President Obama, who’s anti-business, anti-rich rhetoric has not endeared him to the business community. Having said this, investors will be relieved just to have the uncertainties surrounding tax laws and the state of the U.S. budget cleared up one way or the other. The only thing that would derail our positive view for the stocks would be if President Obama makes further attempts to expand the role of government at the expense of the business community or if earnings disappoint. As will be familiar to many readers, we rely on our models more than we rely on the hot news of the day. Eventually stock prices follow value. We believe stocks are already undervalued and will become more so in the year to come. In this environment the path of least resistance for stocks is up.

Source: Rising Dividend Investing

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