For many investors, dealing with stocks is a numbers game. Metrics, historic patterns, and technical indicators paint a comprehensive numerical picture of a company that helps these investors decide whether it’s worth investing in. But it’s not that straightforward, because one of the most important forces that drive the stock market up or down is something that we can’t quantify: investor sentiment.
Positive investor sentiment can keep a market healthy, even in turbulent economic times. It was probably one of the primary drivers behind the decade-long bull run we saw before the March crash. Many investors and experts believed that the market had gotten too overpriced. Now that the underlying economy is even weaker than before, we might be paying even more for stocks.
Warren Buffett’s friend and Berkshire Hathaway’s vice chairman Charlie Munger stated in an interview that the last decade’s growth of the stock market was unprecedented. He also said that investors might not see the same kind of returns in the coming decade. Another comment he made regarding the current market frenzy was that nobody knows when the bubbles are going to blow up.
Buffett hasn’t used the same words to describe the market, but he is likely of the same opinion. He had been saying, even before the crash, that the stock market is overpriced. If it was overpriced before, it’s even more aggressively overpriced now, because the economy is essentially weak, and it has been propped up by stimulus packages and Federal Reserve.
Buffett’s and Charlie Munger’s fears regarding a frenzy in the stock market can be seen in the tech-heavy Nasdaq’s bloated valuation. Nasdaq Composite is currently 40.8% higher than its start-of-the-year valuation.
Fairly valued stocks
Many TSX companies are still struggling to reclaim their pre-pandemic valuations. There are some fantastic undervalued and reasonably valued companies among them, which can make powerful additions to your portfolio. One such company is MCAN mortgage (TSX:MKP), a Toronto-based residential and commercial mortgage company with a market capitalization of $303 million.
MCAN is growing its net income quarter over quarter for the last five years, and its balance sheet is quite strong. MCAN might not be a good fit if you are looking for steady capital growth, because its stock price has been fluctuating quite erratically for the last five years. But if you are looking to lock in a juicy 8.3% yield, then MCAN might be precisely what you are looking for.
The yield is enough to help you start a $100/month dividend income with just $15,000 invested in the company.
The stock market across the border is precariously overvalued. Even on the TSX, most tech stocks are still trading at too high a price. Another market crash might knock these valuations down to fair territory. Or they’ll simply normalize over the next year. If you are not hopeful about the long-term prospects of an overvalued stock in your portfolio, you may consider selling it while you can still realize maximum gains.
Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares).