Close Calls: Damn the corrections – full speed ahead!

Welcome back to Close Calls for the week of June 23 to June 27.

I never dismiss the effects of emotion on the market, or on myself, for they are tremendous. This week, however, I conclude that while we may be overdue for a correction, the best thing is almost certainly to ignore that fact. Here's how I learned to stop worrying and love the record highs:

First, I've changed my bullish/bearish criteria somewhat. Only companies that are likely to retain their value during a correction now get the bullish nod, and I save the bearish nod for the companies that look likely to fall through the floor in a correction.

Second, I waded through a great many valuation graphs, most of which were made specifically to prove one point or another, until I found what I judged to be the best, real data, and yes, that almost always requires the use of personal judgement. My conclusion, which I will have more to say about on Monday, is that there may or may not be a correction at all, and there will absolutely not be an end any time soon to the bull market.

Right now, the average P/E of all S&P composite stocks is just 18.3. No bull market has ever ended with the average P/Es so low. As for the market excesses of the late 1990s and early 2000's, we are nowhere near them. The average P/Es then were 34 and 46.7 respectively. There is so much upside left in this market, in fact, that in the long-term, it scarcely matters whether or not there is a correction. I let my eyes wander to feet, but it was a worthwhile lesson and now they are back on the horizon.


I thought I would be extra clever and figure out which social media company would win out in the end, then jump back into the stock before anyone else. I can happily say that I've found my chosen one, but it seems I'm not the only one who knows about it.

When Facebook ( FB ) didn't make sense as an investment (not enough revenue or earnings), I didn't like it. When FB stock went public, it's founders chose to charge the market for the company they wanted to make, not the one they had, even though they knew they were about two years behind what the Street was willing to pay. I found that offensive, then.

I still think what they did was offensive then , only now I don't care, because seemingly against all odds, Facebook has turned into the one company that knows how to duke it out with Google for Internet and mobile ad revenue. Also, it is clear that Facebook simply doesn't need the youngest, hippest internet users. It needs the least savvy users available-the great everyone else-and it has them. In all ways, it has them.

Facebook's foreword P/E Ratio is 36, and its annual revenue growth of 71%. This is about math , and after plugging in a few reasonable (to my mind) projections, I conclude that FB stock will likely trade at $200 per share, perhaps even $250 per share, in 24 months. If I'm right, the Facebook of two years from now will be worth more than is the Apple of today, but that seems perfectly reasonable as well.

Despite all that, FB stock, at $67.60, is still more than 6% below its high.

Recap, Bear Positions taken June 23, 2014

Company Initial Price

Sears Holdings ( SHLD ) $40.61

Novatel Wireless ( NVTL ) $2.01

Sanmina ( SANM ) $22.32

Gibraltar Industries ( ROCK ) $16.18

AMD (AMD) $4.36

Recap, Bear Positions taken June 27, 2014

Company Initial Price

Citigroup (C) $47.95

Ensco (ESV) $55.02

Unum (UNM) $34.86

Rio Tinto (RIO) $52.78

Hewlett Packard (HPQ) $33.56

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC .

This article was originally published on

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

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

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