Is the Market Cheap Yet?

Jeremy Glaser: Is the stock market cheap yet? I'm Jeremy Glaser with Morningstar.com. Joining me today is Paul Larson, editor of Morningstar StockInvestor, to talk about if stocks are cheap yet and how valuations could be impacted by what's going on in Europe and other uncertainty across the globe. Paul, thanks for joining me today.

Larson: Thanks for having me.

Glaser: So when you look across the universe 2,000-some-odd stocks that we look at at Morningstar, do things look cheap yet?

Larson: Things are definitely a lot cheaper than they were a couple of weeks ago where we had the market that was looking close to 10% overvalued. And with this correction combined with a number of fair value increases that we've actually seen in recent weeks, the market is now closer to 10% undervalued. And that's the cheapest it's been in several months.

Glaser: Are there any signs that look cheaper than others?

Larson: For sure. The health-care sector still looks cheap. I think there has been an overhang there regarding health-care reform, and a lot of those names reflect that uncertainty to too large a degree in our opinion. And then more recently, the financial sector is one that has popped up as looking a little undervalued. And I think it is both the situation in Europe that is overhanging and also the regulatory reform that we have here in the United States where people are selling first and asking questions later.

Glaser: On the flip-side, are there any sectors that still look to be pretty expensive?

Larson: The technology sector still looks a little expensive at this point in time. And the rest of those sectors that we have look more or less fairly valued.

Glaser: You mentioned that a lot of fair values are actually coming up, and there hasn't been a ton of changes to fair value uncertainty ratings. How are you and the analyst staff thinking about the crisis in Europe and its impact on stock valuations?

Larson: Well, it's very hard to put a direct relationship from what's going on in Europe to our individual companies at this point in time, because it is worth noting that what is going on in Europe is primarily revolving sovereign debt. And connecting the dots to what that will mean to a manufacturing company here in the United States is not necessarily easy.

Yes, our exports are going to have a tougher time competing with European exports, but then perhaps some of these companies are sourcing from Europe, and then all of a sudden their costs are going to go down. Again, it's just very difficult to connect the dots at this point.

Glaser: What would you need to see before there are wholesale changes to either fair values or uncertainty ratings?

Larson: Well, I think if this current conflagration really were to expand into a global wildfire and we get a second-coming of the credit crisis that we saw a real freeze in overall credit, I think that would really cause us to assess all of our uncertainty and fair value estimates. We haven't come to that point yet, but it's something that we've definitely got on the radar.

Glaser: There's been a lot of good news over the last couple months. Corporate earnings tend to be better than expected, good economic data. But recently, everything's been overshadowed by what's happening in Europe. Do you think the summer is going to continue to see more bad news, investor sentiment is going to continue to be down? What kind of data points could we see before we have another earnings season that could give investors a reason to smile?

Larson: Well, the economic reports that we're still getting, even today we saw a durable goods report that was very, very strong. If we continue to get reports like that, we'll get reminders that we are in recovery mode here in the United States, and we don't have austerity measures to worry about just yet.

And we also... The employment picture, if trends continue there, if we continue to add jobs and maybe just mildly chip away at that unemployment rate, that will be very good news. And then, of course, we will get the occasional off-cycle earnings report, and the earnings that we've seen thus far in 2010 have been nothing short of stunning. If you are a company and you are not reporting operating earnings up at least 20 percent, you are slacking.

Glaser: Thanks for talking with me today, Paul.

Larson: Thanks for having me again.

Glaser: For Morningstar.com, I'm Jeremy Glaser.