Four Stocks Fool Smart Money

Scratch an intellectual on the trading floor of the New York Stock Exchange, and under that Brooks Brothers shirt you'll usually find the hair of a bear. This is because smart people excel at criticism. They love the sound of skepticism, nitpicking and naysaying. While the unwashed masses on Main Street prefer good cheer, the ursine mossbacks on Wall Street prefer a Bronx cheer.

That's one reason the past year's rally in stocks has provoked such loathing among brainy professionals. They look at the rising personal balance sheet of the country's swelling army of 401(k) holders and a well-bred anger wells up inside.

They point to the high price-to-earnings multiples and low growth rates of the country's biggest companies, the historic level of selling among corporate insiders, persistently poor employment growth, the remarkable number of small-cap stocks at 52-week highs and rising margin-debt levels, and insist that the public is racing head over high heels into another speculative bubble that will end badly -- and soon.

But is this really the case, or is it just another of the market's famous deceptions?

The Latest Bear Case

First let's hear from one of those cerebral bears. Robert Drach, a Florida trader with an enviable long-term record, says investors chasing stocks today are ignoring a fence labeled "Land Mines" as they jump into a field of beautiful daisies. "What can look appealing can equate to jumping into the cloak of the ... Grim Reaper," he wrote in a letter to clients last week.

"We have watched jumpers for a quarter of a century. Always giddy during periods of excessive speculation, at final count they are the fodder that feeds those who conduct themselves professionally," he added. Drach has found the market so dangerous that his asset-allocation recommendation has been stuck at around 13% stocks and 87% cash for months.

He has a lot of intelligent company. My office adjoins a municipal bond underwriting and trading firm, and two of its top employees -- an investment banker and a trader -- confessed to me this month that they sat out the entire 2003 surge in equities. They missed the postwar start last spring, then got hamstrung by the powerful emotion of regret. They waited for the pullback that never came, and still have stubbornly not put their resources back to work.