With the economy mired deep in recession, you'd be crazy to invest in a market selling at 20 times this year's estimated earnings, right? Alas, it seems crazy is exactly what we've got.

Yes we can ... be completely irrational
By the end of last week, 466 of the S&P 500-member companies had reported first-quarter 2009 earnings. Collectively, the group posted $10.09 per share in operating earnings. According to Standard & Poor's Economics Department, those quarterly results will improve only marginally throughout the remainder of the year. Thus, the S&P 500, trading in the 900 range, is valued at a 2009 P/E of more than 20.

The numbers only get worse. Notice that the above calculations use operating earnings, a non-GAAP metric that excludes one-time items such as asset value writedowns. Based on reported earnings estimates, S&P economists put the market at a loftier 2009 P/E of 31. Need some perspective? Toward the end of the 1973-74 bear market, the S&P 500 was kicking along at a trailing-12-month P/E of roughly 7.

As far as I see it, our current economic challenges outdo the oil crisis and high inflation of the 1970s, which leads me to believe that this keeps-on-going rally is more about force of will than a focus on fundamentals. But even though investing in the broad market looks pigheaded right now, don't assume that every stock out there will get you slaughtered.

CAPS your insight
I'm increasingly fond of using Motley Fool's CAPS investing community as a research tool. In order to zero in on stocks that are benefitting from steady/improving fundamentals, rather than mere market momentum, I used the CAPS screener to search for stocks that have maintained top four- or five-star CAPS ratings over the past few months, or better yet, have been upgraded from four stars to five. From the screen results, I've chosen the five stocks listed below, all of which are trading at about half of the market's 2009 P/E, based on the average analyst estimate listed on Yahoo! Finance.

Company

CAPS rating on 3/20/09

CAPS rating on 5/20/09

2009 P/E

Dividend Yield

Bristol-Myers Squibb (NYSE: BMY)

****

****

10.6

6.1%

Diana Shipping (NYSE: DSX)

****

****

10.1

N/A*

Forest Laboratories (NYSE: FRX)

*****

*****

6.7**

N/A

Sanofi-Aventis (NYSE: SNY)

*****

****

7.1 Continued...