Don’t Buy The Hype Stocks Are Due for a Correction

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

There are a lot of great companies out there to consider; the only problem is that the vast majority of them are no longer attractively valued. The broader stock market has made and will continue to make its recovery since the financial crisis, and with higher stock prices come less attractive valuations.

Stock prices are going up, but earnings and revenues are not. This is a dangerous combination and it has to reverse itself in order for the current rally to continue. Main Street success is what’s needed now for the broader market to do well in 2010.

I’ve written a lot about a business that’s as recession-proof as you can get. The company is called Quality Systems, Inc. (NASDAQ/QSII) and this enterprise operates in what I think is one of the best businesses in the world — it helps automate medical and dental practices with new technology. As I wrote before, there’s no better target market for any business than doctors and dentists. They don’t have time and they do have money.

This stock has doubled since the beginning of the year and this is the problem. While Wall Street analysts expect the company’s revenues to grow by 20% this year and another 20% next year, the stock has a current price-to-earnings ratio of about 38. That’s expensive in any market.

If the Dow Jones Industrial Average ticks higher to the 11,000 mark (which I think it will) going into 2010, most stocks will also go up incrementally. But, in my view, the big money has been made. The 2009 March low was a once-in-a-lifetime opportunity, in which just owning the index brought substantial capital gains. Now we have the problem of trying to find great opportunities in the stock market that are reasonably valued. From my perspective, there are very few right now.

Currently, I think the stock market is slowly running out of steam. I also think we’re due for a substantial correction — a correction that would likely be a great entry point for taking on new positions.