Where to Find an Investment Opportunity in a Market That’s Much Too High

Investment Opportunity in a Market That’s Much Too HighThe stock market is ready for a long-deserved break. There’s already been a small consolidation among many brand-name blue chips. PepsiCo, Inc. (PEP), one of my favorite benchmarks, is a couple points off its high with a trailing price-to-earnings multiple of approximately 20 and a forward price-to-earnings multiple of approximately 18.

PepsiCo is a good business. In fact, it’s better than The Coca-Cola Company (KO), which is useful if you are thinking about these stocks in a long-term equity market portfolio.

I continue to find it difficult to be a buyer in this stock market. Recognizing the opportunity cost of not being in the market and the fact that there are always good trades out there, I’m just not a big fan of loading up on the equity market right now.

The resilience that the stock market has shown this year is pronounced. But I refer you back to the fact that the stock market is very much a leading indicator, a speculative pricing mechanism of the value of future earnings. Given the performance of corporate earnings in the second quarter of 2013 and Wall Street’s expectations for the bottom half of the year, the stock market is fully priced.

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One income-generating sector that’s losing some of its shine is the utilities sector. On the stock market, this sector was particularly hot in the first six months of the year, but has pulled back with pressure on interest rates. This is an area where I would be focusing if looking for new dividend-paying stocks.

Noteworthy names within the group are The Southern Company (SO) and Duke Energy Corporation (DUK). A balanced stock market portfolio is always well served by a higher-yielding utility stock. Both Southern and Duke offer current dividend yields of more than four percent.

In terms of portfolio strategy, traditional names like Johnson & Johnson (JNJ), Colgate-Palmolive Company (CL), and The Procter & Gamble Company (PG) are very lofty in terms of their valuations. These businesses aren’t going away by any means, but now isn’t the time to be buying them. (See “One Company, Two Vital Themes to Consider.”)

The stock market has been chasing these names since last summer, as the marketplace craves stability in earnings and dividends.

Frankly, in terms of large-caps in this market, there aren’t a lot of buying opportunities that stand out as a real deal. Oil is holding above $100.00 a barrel, but big oil companies reported only mediocre second-quarter numbers. The problem for big oil is declining production. Growth is becoming a serious issue for the big players; they just can’t find and extract enough of the commodity.

Really, the only attractive area in terms of sector strategy is the utilities, and this group is likely to continue to be under pressure due to rising interest rates.

The stock market is very much a hold at this time. We’re due for a correction—but then again, there’s nowhere else for investors to go to generate a rate of return greater than the inflation rate. There are no bandwagons in this market.