Targeting Market Winners for 2007

By Chad Brand of Peridot Capitalist

I’ve been spending time on Peridot’s 2007 Select List lately, hence my blogging frequency has slowed a bit. At any rate, my strategy for 2007 is going to be a bit different than last year. With the market having done extraordinarily well since August or so, my tendency to take a very contrarian approach will be even more apparent than usual as we head into early next year.

I forget the exact number of days, but it has been a very long time since we have had a 10% correction. I’d be surprised if one didn’t come next year. After we get a sell-off, and therefore digest these outsized gains we’ve seen, I’ll likely become more aggressive. Until then, my investment selections (as readers will see when the 2007 Select List is issued during the first week of January) will focus on large caps that have lagged the market in 2006, as well as smaller cap growth stocks that should continue to do well regardless of the domestic economic environment in 2007 (I’m not going to try and predict when, if at all, a recession will hit, as it’s anyone’s guess).

Despite the double digit gain in the S&P 500 so far this year, my research recently has uncovered many large cap growth companies that are trading at market multiples. Earnings growth for these firms should be above-average, but for some reason their P/E multiples are not. The common debate among Wall Street strategists right now, as they try to gauge the market’s overall direction in 2007, seems to revolve around whether or not the S&P 500 multiple should remain around 15 or 16, or perhaps rise to the 17-18 area. I’m not really comfortable forecasting P/E expansion in 2007, but for companies that are set to grow earnings per share at 12 to 15 percent annually for the rest of the decade, there is no doubt in my mind that a 15 or 16 P/E is too conservative. So, while I believe market gains overall in 2007 will be below 2006 levels, there are still values to be had.

Stay tuned for more details, both in the upcoming second annual Select List, as well as future blog postings.

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