The angst over Federal Reserve policy continues. Last week market participants were caught off guard when the central bank noted that economic strength had yet to merit taking bond-buying off the table. Stocks roared higher on the news, but the gains might not last.
The end is coming, and if not in September, then soon.
It’s been telegraphed — although not very well — that the Federal Reserve would like to end its QE Infinity program. The question is not if, but when.
Does it really matter? Not in my opinion. At the end of the day, stocks are priced based on valuations and valuations are fueled by operating performance. If a company grows its profits at a healthy rate, its share price will most likely appreciate.
In the last two years we have seen impressive valuation expansion in the market. Knowing that tapering will come at some point alters the equation for investors.
As interest rates rise, fixed-income securities become all the more attractive, especially compared to pricey stocks.
It will take impressive earnings growth to offset the changing of the calculus and while growth is the likely outcome for many publicly traded stocks, I’m not sure it will be enough to offset a gradual reduction in valuation premium.
As such, the easier call to make right now is this: What stocks might investors want to part with?
Using a stock-ranking system that is based on valuation and profit growth – something I like to call the P/E Gap – I can find prime targets to sell. These are the stocks that have premium valuations and less-than-impressive profit growth expectations.
Here are three issues that you might consider selling before the Fed tapers: