The S&P 500 index has lifted nicely from its 52-week low of 769, set earlier this month. Optimists have interpreted the move as a sign of a market bottom, and they may well be right. But that doesn’t mean all stocks are cheap.

Take Weight Watchers International, for example. Since a public offering in mid-November of last year, the stock has been on a tear, rising from $24 to a recent $47. True, Weight Watchers had some good news: Both its earnings and attendance at the company’s weight-loss classes have been above expectations. Recent controversy about the extent of America’s problems with weight and obesity has also helped the stock.

Still, Weight Watchers looks a bit too pricey. It sells for 36 times expected earnings per share for this year. Contrast that with an estimated annual price-to-earnings ratio of 18 for the S&P 500. And Weight Watcher’s price-to-sales ratio (PSR) of 7 isn’t exactly reassuring.

Another red flag: For its latest reported quarter, ended June, Weight Watchers’ total debt stood at 83% of total assets. That’s down from the prior quarter, but still looks ugly next to the 25% average for S&P 500 companies.

Like the other companies in the table, Weight Watchers has good fundamentals and promising growth prospects, but the market may have bid its shares too high in relation to its industry or historical norms.

Full story at Forbes.com

Only the most efficient companies fare well in a period of falling prices and slack productive capacity. Look at the success of low-cost operators such as Southwest Airlines and JetBlue, or Dell’s continued dominance in computer hardware. Predicting more such winners in the current economy isn’t easy, but one strategy might help: Bet on companies carrying a manageable debt load.

“Having debt is never so expensive as when inflation is low and moving lower,” says Jason Trennert, investment strategist and senior managing director at New York brokerage and economic research firm International Strategy & Investment.

Trennert and colleagues don’t expect a surge in corporate pricing power anytime soon. What’s more, even if trouble in the Middle East forces oil prices up in the short term (see story, p. 126), the deflationary trend is unlikely to abate. Why? Companies, still saddled with too much capacity, will find it hard to pass on energy costs to consumers. “There’s no way to sugarcoat a spike in oil prices,” Trennert warns.

Full story (reg. required) at Forbes.com

According to Edward Yardeni’s “Fed model,” it’s a great time to buy stocks.

An investment strategist with Prudential Securities, Yardeni derived this valuation technique from a 1997 monetary policy paper from the Federal Reserve. Roughly speaking, Yardeni’s model (never endorsed by the Fed) says that the fair value price for the S&P 500 is equal to estimated earnings for the index divided by the yield on the ten-year Treasury note.

According to Thomson Financial, estimated next-12-month earnings for the S&P 500 now stand at $54.53 a share. Divide that by the 3.996% yield on the ten-year Treasury, and you arrive at a fair value price for the S&P 500 of 1,365. As of last night, the index closed at 881.

Thus, by Yardeni’s model, the market is undervalued by 35%.

Full story at Forbes.com