2006: Year of What If

Don't color me bullish. Rather, consider me willing to question and bet against the intellectually interesting, yet so far incorrect, economic-disaster scenario.

What if the housing market doesn't crash?

What if the Fed engineers a soft landing?

What if global growth outside the U.S. accelerates?

What if the rate hikes are finished?

I will tell you what. Next year could be another decent one for stocks, especially economically sensitive ones.

Last December, I predicted a choppy, modest return year for the U.S. stock market. I also opined that decent returns could be garnered from either rapidly growing or compellingly valued stocks. I termed 2005 "The Year of Extreme Investing." It was not a bad year, but no barnburner either. In fact, the markets played out mostly as I expected this year. The average stock appreciated around 8%, a bit better than the S&P 500.

Share prices in extreme growers, like Apple(AAPL) and Google(GOOG), exploded. And many deep-value sectors such as homebuilders, managed care, energy, raw materials and machinery stocks posted impressive gains. Interest-sensitive shares such as REITs and utilities also performed well.

However, the 15 to 20 times P/E-valued, 7% to 10% growing, large-cap stocks struggled. Category-killer franchise companies such as Microsoft(MSFT), Cisco(CSCO), Wal-Mart(WMT), Anheuser-Busch(BUD), Coca-Cola(KO), Merck(MRK), DuPont(DD), Alcoa(AA), General Electric(GE) and Verizon(VZ) either declined or treaded water.

These stocks were neither fish nor fowl, not growing rapidly to generate investor enthusiasm nor undervalued. Most ended the year much cheaper than they began, yet remain in style limbo as "cheaper, former growth stocks."

Second Verse, Same as the First

Unfortunately, 2006 is shaping up similarly to the current year.

There are individual stocks that are compellingly valued, many in economically sensitive sectors and appear to offer excellent appreciation potential. And here I mean "hated" stocks with 7-10 P/E ratios, and not the "relatively cheap" ones at midteen valuations. They include the usual suspects in the raw materials, industrial, consumer-durable, retail and energy sectors. Investors can load the boat on many low P/E stocks and make very good money under the right scenario.