How to play Wall Street's "Wonder Market"

Stock markets all-time high

The U.S. stock market is going gangbusters beyond belief, with the three major indexes climbing to fresh highs seven days in a row through last Thursday. The winning streaks – the longest in several years -- mostly ended Friday with tiny losses. The S&P 500 dropped 0.1 percent, or 3 points, to close at 2,549. The Dow Jones industrials slipped 0.01 percent, or 1.7 points lower, to end at 22,774. And Nasdaq edged up 0.1 percent, or 5 points, finishing at 6,590.

No question, equities are making history with a "Wonder Market" in the making that continues to surpass most analysts' expectations. Stocks aren't rising explosively but steadily and incrementally, without much drama or intense volatility. Many investors by now are surely wondering: Buy more or bail?

The drama really is more on the side of why the market shouldn't be in this long period of an upswing. Consider the many negative issues lurking worldwide, including a serious threat of a nuclear confrontation with North Korea, the grim reality that special prosecutor Robert Mueller's investigations into Russia's machinations with the U.S. presidential election could result in great upheaval in Washington and the upsurge of unmitigated violence in America, Europe and elsewhere due to horrendous mass shootings and bombings.

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Is the market's bullishness out of whack with reality, or are the economic and market fundamentals providing support for the unexpectedly positive moves? 

"This is a classic bull market exuberance, a momentum that is hard to shut off," said Gorge Brooks, editor of the market newsletter Investors' First Read. 

In late-stage bull markets, rising prices tend to prompt greater risk-taking and bring in new investors, Brooks added. "It's the reverse of a bear market where mounting fear escalates as prices drop," he said, and right now, "we're seeing greed creep in ... the draw of rising prices is irresistible."    

Investors without doubt should embrace what the market is delivering, but they should also brace for a significant correction and take steps to protect their portfolio gains. And they need to prepare for buying opportunities that such a pullback would open.

First thing for investors to keep in mind is not to do any wholesale selling. Rather, pick out the stocks that have amassed plentiful gains that you could unload to build cash reserves for the next buying opportunity. Don't sell all those winners, however. Keep enough of the same stock that would equal the value of the original holdings. 

In essence, what investors would be doing is to take profits from their holdings without reducing the original amount of money they put into those stocks. 

Second step: Make a list of the stocks you would want to own at lower prices when the next correction comes around. Many of the stocks you would want are probably the same companies in your portfolio from which you took your profits. They have proved their worth as winners, so you would want to buy more of those shares -- only at reduced prices, when the next correction comes around.

Of course, it would make sense as well if you bought shares of other high-quality companies when their prices get slashed by the pullback.

One such stock that's highly recommended as a "buy" by several Wall Street analysts is Sherwin-Williams (SHW), the largest U.S. producer of paints, coatings and related products that it distributes worldwide. Currently trading at $383 a share, its stock has been in an uptrend since 2013, when it traded at $145. 

Arun Vishwanathan, equity analyst at RBC Capital Markets, is impressed by the company's long-term targets on revenue growth, pricing power and cash generation, which he said were "all above even our most robust expectations." So he has raised his 2019 estimates and price target, rating the stock as "outperform." He increased his price target for Sherwin-Williams to $423 a share, way up from $390.

He pointed to other near-term reasons for remaining positive, including the strong year-to-year improvement in same-store sales, "price capture" in both its own stores and its Valspar unit's coatings businesses, continued new store openings and increased expansion in international markets, especially in Asia and Europe.

"We believe Sherwin-Wiliams is the best way to play the ongoing growth in construction markets," the analyst pointed out. Some 70 percent of the company's sales and EBITDA come from the U.S.  construction market. "We expect its industry-leading growth, margins and cash flow generation to continue expanding as the construction markets improve due to high correlation between architectural coatings volume and existing home sales," says Vishwanahan. 

Christopher Muir, equity analyst at CFRA Research, who rates Sherwin-Williams a "buy," expects revenues to jump 27 percent in 2017 and 17 percent in 2018, following a 46 percent advance in 2016. He expects the growth in 2017 will come from the company's acquisition in 2016 of Valspar and continued improvement in residential construction and nonresidential projects. He figures Sherwin-Williams will earn $14.85 a share in 2017 and climb to $17.85 in 2018. It earned $11.99 in 2016.

Indeed, in recognition of Sherwin-Wiliams' improving prospects, CFRA Research has included the company in its "High Quality Capital Appreciation Portfolio."