Does valuation matter?
There are moments in time when it does not. We are seeing one of those moments today.
To that, I say be very careful. Buying stocks simply because the market is rising is a dangerous game. Any number of things can change the mood and do so very quickly.
As they say, you don’t want to be caught holding the bag.
One of the triggers for a downswing in the market is the quarterly earnings report. When a company reports operating results the market can better judge what a company is worth. If that new valuation differs greatly from where the stock currently trades, fireworks can occur.
It is not unusual to see stocks move 5% to 10% after announcing profit numbers. In some cases the gains or losses can be even more.
In the current market environment, stocks are in full-blown rally mode. Perhaps you’ve been distracted by the noise of political debate over the fiscal cliff or other issues to notice, but stocks added double digits last year.
So far in January, stocks have added another 4% to the tally.
The gains put many names at 52-week highs if not multi-year highs. A high in and of itself is not a bad thing, but if the valuation is excessive the earnings report becomes even more important to the narrative.
Miss the number and look out below.
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Here are five names to jettison before they report results next week: