Searching for Pockets of Strength

 | Oct 29, 2013 | 2:30 PM EDT  | Comments
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This might not be the best thing for an investment columnist to admit, but I am having a harder and harder time finding any bargains in this market right now. Maybe it is not all that surprising, given that after solid gains in the markets in 2011 and 2012, we have had a run-up of about 20% this year.

Simply put, a market priced at about 16x earnings that has earnings growing less than 5% year over year this quarter is not going to yield a gusher of bargain-priced stocks. It is true that S&P 500 earnings are currently projected to go up 10% next year. However, since S&P margins are at record levels, and since economic and job growth is likely to be tepid in the near and medium term, I am highly dubious of this consensus.

Apple (AAPL) remains the largest position in my portfolio. It is at the start of a new product cycle, having just launched new versions of the iPhone and planning a new iPad rollout right over the horizon. I also believe it will sign China Mobile (CHL) to a distribution deal by the end of the year, and that would give it access to more than 700 million consumers. Subtracting the company's huge cash hoard, the stock is selling for right around 8x forward earnings, which I still find attractive.

However, after the stock has run up more 30% from the lows of late June, it is no longer the "no-brainer" it was at $400 a share. I believe the key in deploying new money in the market at these levels is to find "pockets of strength".

One such pocket right now is domestic auto manufacturing, as the industry ramps up to pre-financial-crisis production levels. Ford (F) reported stellar numbers last week, and auto-parts manufacturers Tenneco (TEN) and Lear (LEA) reported earnings yesterday that beat the top- and bottom-line consensus.

I believe General Motors (GM) is a buy into earnings that should hit the wires tomorrow. The company has easily beaten the bottom-line consensus in five of the last six quarters. Earnings and revenue growth are projected to accelerate in fiscal 2014, and the shares are still cheap at under 8x forward earnings, especially if the company reports the same improvement in its European operations that Ford recently did.

Large biotech companies also seem to be delivering strong results this quarter, with Amgen (AMGN) and Biogen Idec (BIIB) both coming through with results that beat on both the top and the bottom lines. Gilead Sciences (GILD) reports after the bell tonight, and I still like this biotech player for the same reasons I outlined recently in this pages.

Gilead has a bright future ahead of it, as its hepatitis C and HIV products continue to drive significant growth. Revenue and earnings are both projected to accelerate sharply in 2014. The company should also benefit as the implementation of Affordable Care Act expands the population of insured individuals in demographics that suffer from these diseases in greater proportion than the overall population.

Until the market has a significant pullback or the prospects for job and economic improve substantially, investors are best served by finding plays in sectors that are delivering good results selling at reasonable valuations. Take your rifle to this hunt, and leave the shotgun at home.

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