Portfolio manager Irwin Michael says it’s getting tougher to find undervalued stocks, and that investors must be cautious.

In a new market commentary, the manager of ABC Funds says that January’s relentless market gains made investing look easy once again. This invited further retail investor speculation in junior stocks and IPOs, which has in turn helped build greater optimism and unreasonable expectations. “As a result, the stock market has performed very erratically… We expect increasing volatility to last at least until the U.S. November 2004 Presidential election,” says Michael.

The noted value investor says that as North American stock markets have continuously climbed the proverbial wall of worry it is becoming rather difficult to uncover undervalued company shares. “In fact, a year ago we would review three stocks and purchase one. Today, we analyze 10 stocks and select only one,” he explains. “Although it is not impossible to select attractive common stocks the fact is that one must not lower one’s selection standards in an effort to ‘put money to work’. Clearly a disciplined and selective stock picking process will be of prime importance in attaining superior investment success for 2004.”

On the macro view, Michael says that ABC remains generally optimistic on the North American economies. “We believe record low interest rates, a weak US$ and subdued inflation should lead toward improving corporate profits and rising capital expenditures. The North American consumer, albeit somewhat fatigued, should continue his buying patterns although perhaps not with the same exuberance as the past year. The bottom line is we do not foresee any economic slowdown for at least the next 12 to 18 months,” he concludes.

“This positive outlook gives us the confidence that while the North American stock markets are not exactly cheap, they will provide selective profitable opportunities over the next year.”

He suggests that there is a “significant pool of cash impatiently waiting to be invested in the stock market”, which, “adds to our general comfort.”