Buy these stocks instead of their overpriced rivals

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With the Dow Jones and S&P remaining near record high levels, it has become increasingly difficult to spot tomorrow's winning stocks. As the markets have trended higher, so have stock valuations. This creates a problem for investors that use P/E ratios as a gauge of a stock's value.

The scenario creates a major problem for most investors, because while everyone wants to get into the strong market, no one wants to overpay for their investments. A good way to get around this problem is to look for stocks that have shown a lot of strength, but have high valuations, and then find other stocks in the same sector that have also been strong, but whose valuations have not yet appreciated to the point of being overbought.

We are going to use price-to-earnings ratio as our tool to measure a stock's valuation. To begin the process, we will run screens for stocks with high valuations ( P/E's above 30 ), and then find which of these stocks have shown technical strength over the last year.


Once we identify a stock that has shown technical strength, but has a high valuation we will start looking at other stocks in the same sector. What we are looking for are stocks that have also been strong, but whose valuations have not yet risen into overbought territory. The idea is that analysts will turn to these stocks in order to find value, and if we can get there first it optimizes our upside potential.


Continue reading page 2 of this article


This article was originally published on MarketIntelligeneCenter.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , commodities , insurance , Technology

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