Growing Concerned About 2005

The market has had a slam-dunk run since the fall and nearly every sector has participated. Internet stock analysts are back speculating about how far this move can go. Small-caps are smoking, even businesses with poor fundamentals. The Value Line median P/E ratio is pushing multiples in the 20s once again.

I think it's time to rein in some optimism on the long side. Despite the tendencies for the well-documented seasonal strength into the spring, I'm getting concerned about the market's prospects, especially next year's second half.

I'm not yet turning outright bearish; this is simply some year-end house-cleaning. My long portfolio still contains many of the value names I owned for most of the year: homebuilders, managed care and technology turnarounds, as well as selected one-offs in energy, retail, financial and industrial stocks.

Portfolio Wellness

The managed-care stocks have solid fundamentals and strong charts, and still boast reasonable valuations. My favorite, WellPoint (WLP), trades for only 12 to 13 times 2006 profit estimates. The company just consummated a large merger that gives it dominant market share under the Blue Cross/Blue Shield brand in many states. The sector also is in the sweet spot of its normal seasonal rally.

I continue to prefer the homebuilders, which should benefit from a healthy stock market and economy in 2005. The housing market should cool materially as we progress through the year, and this is good for the stocks. My companies have established large land positions, which assure them of significant market share gains. I expect healthy revenue and profit growth despite the tempered real estate environment.