Traverse City Record-Eagle

Business

June 20, 2012

Why stocks may be risky

Veterans scoff at notion of big gains later this year

Associated Press

NEW YORK — Job growth in the United States is slowing. Sales at stores have stopped growing. The economies of India, Brazil and China are cooling. Europe is crippled by government debt and bad bank loans.

But there's not much to worry about — at least if you ask the Wall Street analysts who give advice on which stocks to buy and sell.

This famously cheery group says earnings at the biggest U.S. companies, which appear at a standstill today, will start growing again this summer, then leap 15 percent in the last three months of 2012 from a year earlier.

To investors who believe these stock analysts some veteran market watchers have a word of warning, or rather two: You're dreaming.

"Unless something miraculous happens, like all of a sudden Greece is wonderful, I don't see how we get 15 percent," says Christine Short, a senior manager at S&P Capital IQ, referring to one of Europe's troubled countries.

Says Brian Lazorishak, portfolio manager at Chase Investment Counsel: "To get there you almost need an acceleration in economic growth. How and where does that come from?"

Don't ask the economists. They've been cutting estimates for economic growth, not raising them. The stock analysts don't appear to have noticed. For months, they've been telling investors to buy stocks because they're cheap.

The figure cited most often is the so-called forward price-earnings ratio, which is a company's stock price divided by the earnings per share expected over the next 12 months. A lower ratio suggests stocks are cheaper.

For companies in the Standard & Poor's 500, the ratio is 12.3 times, compared with a 35-year average of 12.9. That suggests stocks are reasonably priced. But if the earnings forecasts prove too high, stocks could look less appetizing, or even expensive.

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