Terry Keenan filled in for a vacationing Brenda Buttner.
Terry was joined by: Gary B. Smith, TheStreet.com columnist; Pat Dorsey, Morningstar.com columnist; Scott Bleier, chief investment strategist at Prime Charter; Tobin Smith, editor of ChangeWave Investing; and Gretchen Morgenson, Business editor at The New York Times.
Are stocks cheap or expensive?
Shares in popular stocks like AT&T (T), Microsoft (MSFT), Intel (INTC) and Sun Microsystems (SUNW) are priced lower than they were two years ago. Does that mean they are cheap enough to buy?
Scott says: "The market hasn't been cheap since the fall of Communism!" He adds, "Today we are paying 24 times one dollar of earnings." Not cheap!
Pat Dorsey says: "The reason these [stocks] are down over the past couple of years is that they were the stocks people loved to own. But look at the stocks people hated two years ago like Philip Morris (MO) or even Citigroup (C) they're up 40 or 30 percent over the last couple years." He says: "The lesson is buy stocks that are in the trash bin not in the display case!"
Tobin points that the cost of a company is a function of future earnings and it's very difficult right now to determine earnings potential and stocks that meet earnings expectations will come back.
Gretchen says the problem is that people think earnings will come back to where they were at the top of the market and she says: "That is not going to happen!" Gretchen anticipates single-digit profit growth for the S&P 500 and says people need to ratchet down expectations. "The S&P 500 at this price is way out of control."
Gary B. says all you need to look at the price action in stocks to determine if they are cheap enough to buy. He charted the 40-day moving average of stocks on the NYSE. He says back in April only about 20 percent of those stocks were above their 40-day-moving average and that was a great time to buy because the market came back through June. But now about half of NYSE stocks are above and half are below their 40-day-moving average and you really can't say if they are cheap or not.
Tobin and Scott jumped in to point out that they didn't think watching price action alone was an appropriate way to determine if stocks are cheap or expensive since that's just about demand not earnings potential which should determine the value of a stock. Pat Dorsey said charts like these may be helpful for short-term trading, but would not help long-term investors.
Gretchen reiterated her point that stock prices need to come down because earnings are shrinking. Scott agreed.
Pat Dorsey named two stocks he thinks are just too cheap to pass up right now.
General Motors (GM):
He says they are finally making the right moves necessary to cut costs, improve market share, and make the stock attractive. He sees it at $80 in three years. That's 40 percent above where it's trading right now. He calls it, "Really cheap!"
Gary B checked the chart and calls GM a "quintessential Gary B. short" or a "terrible" play right now. He says he thinks shares could probably climb back to $60 but at that point he's ready to bet the stock will fall once again and take 10-15 years to recover.
Boston Scientific (BSX)
Pat Dorsey says this company is the third largest player in a growing market. It makes coronary stents -- devices that prop open clogged arteries. He says legal problems have hurt the stock and the company is making moves to solve those problems and also to improve its product line, but the stock has yet to reflect the improved outlook making it a great buy.
Gary B. is bearish on Boston Scientific. He says the chart shows "serious resistance" at $20 just below where it trades now and he believes it could go back down to $15.
Gretchen, Scott and Tobin named their "head-fake" stocks stocks they say may lure buyers right now because they look cheap, but really aren't cheap, so watch out!
Gretchen named Dell (DELL) as her "head-fake stock" She says computer sales are falling and a price war is shrinking profit margins which will negatively impact future earnings making this stock more expensive than it looks right now. Toby and Scott agreed the stock is not cheap right now.
Tobin called Coca-Cola (KO) his "head-fake" stock. He says the cost does not support its growth expectations. Scott agreed.
Scott picked Oracle (ORCL) as his "head-fake" stock. He says he evaluated it for its price times its sales, and at 7 times sales it's too expensive. Gretchen added one caveat and that is that Oracle Chairman and CEO, Larry Ellison owns 24% of the stock, and that may be enough incentive for him to keep that stock price up.
Tobin: "Cisco (CSCO) rallies, then drops below current level."
Gary B: "Krispy Kreme (KKD) gets creamed! Shares fall to $20 by October."
Gretchen: "Fed cuts 50 more basis points before year end."
Scott: "Multi-national company's like 3M (MMM), Boeing (BA) Gillette (G) and Caterpillar (CAT) that sell to foreign countries will do well as dollar weakens."
Pat: "Retail stocks have topped. Retail sector is not the place to be right now."