One look at today’s market, and it’s hard to see any value.

But look hard enough, and you’ll find it…

Despite the headlines about valuations ballooning for the “Magnificent Seven,” there are buying opportunities out there.

Everyone knows that the S&P 500 Index is historically most concentrated in just a few stocks – giants like Nvidia (NVDA) and Apple (AAPL). The S&P 500 today is trading for 23 times earnings, more than its 10-year average of 19.5 times earnings.

It’s not cheap.

Investors who focus more on value than growth may be tempted to sit on the sidelines and wait for the next correction to unfold. Then they’d pick up the best stocks on the cheap.

That sounds good in theory. But you could be waiting a long time for that perfect buying opportunity.

As I’ll explain, I’m urging folks to buy today… just not the stocks everyone is talking about.

Let’s rewind a bit, and I’ll give you an example.

In the January issue of the Retirement Millionaire newsletter, we did a bit of new year’s portfolio cleaning. By that, I mean our team went through every holding in the Retirement Millionaire portfolio and decided if we would be willing to buy the stock anew. If it wasn’t a strong buy at current prices, it meant we had to sell the stock.

In general, this is a helpful exercise to do each year.

There was one stock in particular that gave Dr. David “Doc” Eifrig, Director of Research Matt Weinschenk, and me a bit of trouble… It was a $7 billion company that made safety equipment.

Nothing had significantly changed with the business since we bought it in the summer of 2020. It was still growing and had a leading share of the market it’s in. But profits were down a bit. Plus, the stock returned us only 76.6% since our recommendation, just slightly edging out the S&P 500 with a 71.9% total return.

It might sound snobby, but we expected this stock’s outperformance to be much higher.

We then wondered whether we would buy this safety-equipment stock at today’s prices. And as we pored over the company’s financial statements, there was a moment of hesitation.

But we determined that we still believed in the underlying business, even if profits had fallen… because we expected they would rebound shortly.

When we were deciding on the recommendation, Matt said, “At $7 billion, this is exactly the type of stock you’d want to own today.”

That couldn’t have been truer…

I think it’s going to be hard for investors to significantly beat the market if they only focus on large-cap stocks. The attention and number of eyeballs on today’s biggest companies is mind-boggling.

Many of these stocks are priced to perfection. And that’s why it’s going to be very hard to capture large gains… because any single slip-up could knock them from their premium valuations.

So instead, I’ve been looking at mid-cap stocks. These are companies with a market capitalization between $2 billion and $10 billion.

These are not wild speculations that don’t produce any cash. In fact, you’ll find many businesses in the mid-cap sector that dominate their niche industries and are very profitable. They trade for cheap prices, too.

The chart below looks at the next-12-months (“NTM”) price-to-earnings (P/E) ratio for the S&P MidCap 400 Index relative to the S&P 500. If you’re not familiar, the S&P 400 is the index for mid-cap stocks. As you can see, mid-cap valuations remain near historic lows versus large caps…

The next chart shows more of the same. The S&P 500 is trading well above its 20-year average when you look at its forward P/E ratio. Even the S&P 500 Equal Weight Index is trading above historical norms.

But you’ll find more value in smaller companies. Take a look…

Small-cap stocks also look attractive given their valuation. And I do think the broad index could be a good buy… But investors should keep in mind that picking individual small-cap stocks is very difficult, given their speculative nature.

That’s why I’m focusing on mid-cap stocks. Plenty of fantastic, cash-gushing businesses are currently overlooked by the typical mega-cap-obsessed investor.

So don’t wait to buy into today’s rally. The bargains are already out there, if you know where to look.

Here’s to our health, wealth, and a great retirement,

Jeff Havenstein

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Source: Daily Wealth