Where to Find Value in a Pricey Market

With this posture, I have enough exposure to participate in the "relentless rally," but not so much that I would get torched in a no-more-mo-mo downdraft. Here are some of my favorite names these days:

• Western Digital (WDC Quote): At $20, the shares trade for only 8.5 times earnings and 0.65 times sales on my calendar 2007 estimates. That is dirt cheap, even for a disk-drive stock.

  The sell-side still underappreciates the much-improved competitive dynamics in the global hard-drive industry. I forecast accelerating unit growth in drives from many new emerging consumer applications, as well as tempering price declines. Also, I expect even more consolidation from the perennially money-losing Japanese vendors.

  Before long, hard drives could represent an attractive hardware group! A target P/E of 12-13 would generate a $30 stock. It has lately been trading around $20. Remember, the average stock trades for 18 times 2007 estimates.

• Caterpillar (CAT Quote): Still unloved by most investors because of its U.S. housing construction and heavy-duty trucking-related exposures, Caterpillar trades for only 12.5 times 2007 estimates and 10.5 times my 2008 earnings estimates.

  In my opinion, this name represents the highest-class way to participate in my "industrial revolution" theme. Wait, didn't that happen like a million years ago? It didn't for a few billion inhabitants of planet Earth, but it is now. Buy Caterpillar for its exposure to the global infrastructure play. The cycle should have another three or four years. If this company hits its $9 earnings-per-share target in that time frame, the stock could double from its current level of about $67. With an average 18 P/E, this market offers much room for multiple expansion.

• Nabors (NBR Quote): Here's a neat, contrary idea. Buy Nabors, by far the best-of-breed land driller, because day rates are starting to tumble. That's correct: Buy the stock because a slew of new rigs are hitting the market, and prices are dropping. Shouldn't one wait for the bottom? Heck no, then it's too late.

  Look at the huge trade in housing- and trucking-related stocks. These stocks didn't rally until the businesses turned down. And because every analyst knew about the industry declines, they all missed the trade.

  Nabors has very little support from the investment community because of the imminent industry downturn. It should rally big because of it. The 2007 consensus earnings estimate is $4 a share. The stock will trade up in the $40s, even if the company only makes $3 a share. (It's now trading at about $30.) When setting a valuation target, remember that the median stock trades for 18 times 2007 earnings.