Tags: Jeremy | Siegel | rally | stocks

Siegel: 'Extremely Cheap' Stocks Will Only Soar

By Dan Weil   |   Thursday, 18 Mar 2010 03:40 PM

Renowned stock expert Jeremy Siegel says the market’s 70 percent rally during the past year has a lot further to go.

"This is an extremely cheap market," he says.

Others claim that price-earnings (PE) ratios using 10 years of earnings data show the market is overvalued.

But Siegel says that argument is bunk thanks to the huge losses suffered by banks and other financial companies in 2008-09. Those losses are highly unlikely to be repeated, he points out.

"AIG's $80 billion write-off is going to pollute those figures for 10 years," he told The Wall Street Journal.

Instead, Siegel focuses on analysts’ forecasts for future profits, excluding special write-offs that he and others don’t expect to recur.

His research shows that the typical PE is 18.5 when the economy emerges from a recession. But now the market is only trading at about 14.5 times the profits forecast for 2010.

That, of course, means stocks are undervalued.

If stock prices rise to the 18.5 level, the Standard & Poor’s 500 Index could soar more than 20 percent by year-end – to 1400, Siegel says.

"We could easily see 10 to 12 percent stock returns (in coming years).”

Many disagree, including investment guru Marc Faber.

“If we do (make a new high for the S&P 500), I don’t think it will be that far — maybe 1,200. And then I wouldn’t rule out a correction of at least 20 percent,” he told Bloomberg.

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