Here's Why You Don't Shop for Stocks on the Discount Rack

Oh no! The Dow was up 217 points yesterday.

And you know what that means…
It’s time for the usual suspects to start whining about overvalued stocks. Again.

But today we’re snapping up an “overvalued” stock the mainstream financial press probably hates. And I expect it to hand us double-digit gains in a hurry…

But first check out this gem from Reuters over the weekend before the market’s scorching Monday performance:

“As companies in the benchmark Standard & Poor’s 500 begin to release lackluster second quarter results, rich valuations threaten to keep the U.S. stock market spinning in place,” the wire service boldly predicts. “At 16.5 times forward estimates, the S&P 500, up less than 2 percent for the year to date through midday Friday, is about 10 percent more expensive than its historic average of 15…”

Overvalued by 10%? Does that mean we should go to DEFCON 1? Get real, guys.

Reuters does point out that this market’s value remains far below the dot-com peak. Still, the same song and dance about declining earnings heading into the second half of the year is getting, well, old…

See, the truth about expensive stocks is painfully simple – they’re often expensive for a reason. They have brighter prospects. They’re involved in growth industries. They’re well-run companies. You get the idea…

Sure, there are plenty of expensive stocks out there I wouldn’t touch with a 12-foot pole. But some stocks are “expensive” because they flat-out deliver the goods. Period.

These are the companies I want to own—the ones that are expensive for a damn good reason. And there are plenty of ‘em to choose from. Right now I count more than 200 stocks trading on major exchanges with a price-to-earnings ratio greater than 40—that are up at least 20% so far this year…

But before you start scooping up every expensive stock on the market…don’t. I don’t want to buy a stock just because it’s expensive. That’s as stupid as buying a stock just because it’s cheap. For instance, I’m not placing any bets on oil drillers right now—expensive or cheap. Way too much risk right now.

But large-cap biotechs? Sure, I’ll take a ride on that train. After all, this a group that’s thrashing the major averages. These expensive stocks just keep getting pricier.

So what’s better than an expensive stock that continues rising, you might ask? One that continues rising in spite of a bunch of bearish analyst opinions. That’s a great place to look for your next “expensive” stock…

Remember… you get what you pay for.


Greg Guenthner

for The Daily Reckoning

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