A recent release by the Bureau of Economic Analysis found corporate profits surged past expectations in the third quarter, forcing analysts to revise their forecasts for 2015 and 2016. Better than expected profits appear a positive on the surface, but Hugh Johnson, chairman of Hugh Johnson Advisors, says the data has pushed the market well above its average during the current quarter, putting investors on defense.
“We’re about 2%, 3% – if you really want to be precise, 2.7% overvalued,” Johnson said. “I think the market’s got to give some of that back.”
Johnson says the market has returned to competitive levels seen in early September, when investors started to migrate towards the defensive side of the market. That prompted a sharp correction, with the stock market declining 9.8% to a level that was 11% undervalued.
Johnson says the market could be headed for an 8% to 10% correction soon in order to get back to a more fair valued level.
“You know, quite frankly, investors and myself are digging our heels in at current levels,” Johnson said. “It just doesn't feel comfortable buying stocks at this level of valuation. So we need a pull back to levels that make more sense."
For those who just can't quit the stock market Johnson point to defensive names in healthcare and consumer staples as top performers. Among his top picks - Humana (HUM), United Healthcare (UNH), Wellpoint, Celgene (CELG), and household products maker Church and Dwight (CHD).
“Church and Dwight is probably the most aggressive,” Johnson said. “We’re seeing positive performance from household products. It’s reasonably valued, so I would put that at the top of the list.”
As for those healthcare stocks, Johnson notes, "They look awefully attractive... What you want to do in this environment is go with wehat's working and when we look at managed care, when we look at household products, you look at the individual stocks I've suggested, they're working."