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Stocks for a Fully Valued Market

Investors need not shun stocks, but security selection is becoming increasingly important.

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Stock investors are faced with a growing problem: There just aren't that many attractively priced firms to buy right now. It isn't that we are on the precipice of another major economic decline and that stocks are painfully overpriced. It is simply that the market has run up and caught up with corporate fundamentals. Our analyst staff reckons that the median stock in the market is ever so slightly (1%) overvalued today. So does this mean that investors should abandon ship and start hoarding cash? We don't think so. But it does mean that security selection is becoming increasingly important.

In a very undervalued market (such as in March 2009) finding cheap stocks was like shooting fish in a barrel. Everything had sold off indiscriminately, leaving almost all sectors looking attractive. As it became clear that the economy was putting the credit crisis behind it, stocks of all stripes began to rally aggressively. Correlations between stocks were very high, and you could have made solid returns owning almost anything. Now that correlations are declining, individual security selection matters a lot more. But how do you know what stocks are going to hold up the best in this environment?

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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