Tags: Morningstar | conservative | stocks | 2014

Morningstar: Smart Investors Can Stay Frosty With Conservative Stocks

By    |   Tuesday, 31 December 2013 06:48 AM

Going into 2014, U.S. stocks still are not overvalued despite a big ride up in 2013, although investing now in conservative stocks may be the smart play, according to Morningstar's investment outlook.

The investment research firm said median stock prices are trading at only a 2 percent premium to its fair value estimate, even though price-earnings multiples are above their 100-year averages.

Morningstar acknowledged economic recovery and fears of rising interest rates have caused conservative stocks to fall out of favor.

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"However, we're finding some of the most compelling opportunities in more conservative corners of the market, where certain stocks offer attractive total returns and below-average risk."

Examples of conservative stocks that have been out of favor include utilities, real estate investment trusts, pipeline companies and consumer defensive firms, Morningstar said.

But out of the dross created by these market outcasts, Matthew Coffina, editor of the Morningstar StockInvestor newsletter, said he has detected some compelling stocks.

Coffina recommends consumer defensive firms Coca-Cola and Philip Morris International, real estate owner HCP and utility ITC Holdings.

"These firms offer attractive total return prospects with significantly less risk than other areas of the market. In contrast, we find the more economically sensitive technology, industrials, and consumer cyclical sectors to be among the most overvalued."

According to the American Association of Individual Investors Sentiment survey going into the last week of December, the percentage of individual investors who are bullish for the next six months stood at 55.1 percent, a three-year high, versus a historical average of 39 percent.

MarketWatch contributor Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, recommends stocks that are less defensive than Morningstar's are and that depend on the economic recovery and the stock market to keep percolating in 2014.

Her list includes energy companies such as Chesapeake Energy and Devon Energy, big technology firms including Microsoft and Intel, plus blue chips McDonald's and Pfizer.

"With the stock market achieving record highs at the end of 2013, some might think that it is time to take their winnings and go into cash," Furchtgott-Roth said.

"But over the long term, stocks have always had the highest return, and now certain sectors of the U.S. economy look poised for growth."

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Going into 2014, U.S. stocks still are not overvalued despite a big ride up in 2013, although investing now in conservative stocks may be the smart play, according to Morningstar's investment outlook.
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Tuesday, 31 December 2013 06:48 AM
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