BMO says now may be a good time to grab some GARP
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BMO SAYS NOW MAY BE A GOOD TIME TO GRAB SOME GARP
With so much focus on market-level valuations and earnings growth, Brian Belski, chief investment strategist at BMO Capital Markets, thinks many investors appear to be either missing or ignoring some key under-the-radar trends that he believes strongly argue for a highly selective investment approach for U.S. stocks.
"Most notably, market performance trends have undergone a significant shift since the start of 2H as participation levels have jumped quite substantially with most S&P 500 stocks outperforming the index, a sharp contrast to the trend in place for the previous 18+ months," writes Belski in a note.
He adds that "valuation dispersion remains quite elevated compared to historical norms, an indication to us that companies continue to operate at considerably different fundamental rates."
Belski says that correlations have dropped to historically depressed levels meaning a lot more stocks are moving more independently from each other.
From BMO's perspective, these market conditions push stock selection to the forefront and suggest that, moving forward, an active investment approach will likely be crucial to delivering outperformance.
Belski's bottom line is that when it comes to identifying U.S. stock opportunities, employing a growth at a reasonable price (GARP) approach could be beneficial for investors in this type of environment, and fundamental trends for these stocks make the case for adding exposure to this area even more compelling.
One simple approach BMO uses to identify such stocks is to screen the S&P 500 .SPX based on the following characteristics:
* NTM P/E less than the median S&P 500 value
* NTM EPS growth greater than the median S&P 500 value
* NTM PEG ratio less than the median S&P 500 value
Belski lists 13 stocks in his report rated "Outperform" by BMO that fit this simple GARP approach. Among the stocks in this list are: Allstate ALL.N, Electronic Arts EA.O, Merck MRK.N, Schlumberger SLB.N, and Travelers TRV.N.
(Terence Gabriel)
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