Stock Rally Reflects Undervalued Market: Strategists

Wednesday's market rally shows investors are beginning to see brighter news on the horizon and are snapping up stocks seen as overvalued. Phil Orlando, chief equity market strategist at Federated Investors, and John Burns, chief executive officer of Burns Advisory Group, told CNBC on Thursday they share that bullish view.

"I think the volatility we’ve seen for months is a lot about fear in the marketplace, but overall the stocks, and the market, is very well valued," Burns said.

Before Wednesday's rally, many areas of the market in the U.S. and overseas were trading at book value and in some cases less, Burns said, adding that international small value stocks, an area he favors, were trading 30 percent under book value. "That’s just a very compelling argument that stocks are not overly valued," he said.

Burns also favors small cap value stocks in the U.S., and international large value stocks.

Orlando said the rally reflects more upbeat news influencing investor psychology, specifically better-than-expected jobless claims numbers, positive tax comments from U.S. Treasury Secretary Timothy Geithner and potentially positive second quarter earnings results. "Suddenly the news flow is starting to feel better," Orlando said.

Orlando said he's in the "soft patch" camp of market watchers who don't think the economy is heading into another recession, which is why stocks appear so undervalued. (For a different viewpoint see:Kaminsky's Call: Eye on the Home Front).

"We think that $80 in earnings this year, $90 next year are going to be reasonable numbers," Orlando said. "On those valuation metrics, stocks are cheap at 11 times forward earnings. If you believe we’re going into a recession, those estimates are going to have to come down and stocks are not at overly attractive levels."

Orlando favors stocks over bonds and emerging markets over developed ones. Unlike Burns, he favors domestic large cap stocks over small cap.


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Disclosure information was not available for John Burns or Phil Orlando or their companies.