Originally found in the ancient Greek play “The Birds” by Aristophanes, the phrase “cloud cuckoo land” refers to an unrealistically idealistic state where everything is perfect.

The term was used to describe the state of stock market before the crash of 1929 by U.S. Agriculture Secretary Henry Wallace, who would later serve as vice president under Franklin D. Roosevelt.

When I look at the current market conditions, I think we should be dusting off that term again.

U.S. equity markets are making new highs. Yet many pundits don’t view the market as overvalued — but is it?

#-ad_banner-#In search of an answer, I looked at the market’s peak price-to-earnings (P/E) ratios since the early ’80s. What I found was that the average peak P/E prior to a significant market correction was 23.5.

If you’ve read my work here at StreetAuthority, you’ll know I firmly believe that valuations always matter with stocks. Now is no different. This chart concerns me… but something else concerns me even more.

Again, if you’re familiar with my work, you’ve found that I tend to rely on a stock’s forward P/E as an important valuation metric. The current forward P/E for the S&P 500 index is around 16, which means the S&P’s earnings for 2015 are projected to come in at around $118. Current earnings are around $101, which equates to a current P/E of 19.3. This implies that earnings are expected to grow nearly 17%.

The U.S. economy is growing at an annual pace of barely 2%. I’m an optimist, but I just don’t see that kind of earnings growth happening amid such anemic economic growth.

It’s not that a P/E of 16 is crazy — it’s that earnings growth of 17% a year feels too ambitious. And when the market is too ambitious, it sets itself up for disappointment. And when it comes to investing in stocks, disappointment usually ends up in a loss of money.

If the market seems high, one of the best decisions an investor can make is to purchase high-quality stocks that are trading at a discount to the overall market’s forward P/E. This strategy provides upside in the event of positive earnings surprises and downside protection against price volatility in the event of a broader market correction.

Despite the semi-frothy appearance of the overall market, there are some good values out there. Here are three that are on my radar.

1. Oracle (Nasdaq: ORCL): Love or hate Larry Ellison, he’s built Oracle into the 9,000-pound gorilla of enterprise software. Annual revenue has grown at an average rate of 13% annually over the past five years, while earnings per share (EPS) have grown at an average annual clip of 23%. With a forward P/E of 12.9 and a 1.2% dividend yield, the stock looks incredibly cheap.

2. BP (NYSE: BP): Rising from the wreckage of the Deepwater Horizon mess in the Gulf of Mexico, this large, vertically integrated oil producer is one of the most attractively valued energy stocks out there, despite the legal overhang. Revenue and EPS have grown at an average annual rate of 12% over the past five years. The stock trades at a forward P/E of 11 and pays a 4.4% dividend yield.

3. AFLAC (NYSE: AFL): I’ve written extensively about Aflac already, so here’s the quick-and-dirty summary: Five-year average annual revenue growth is a consistent 8%, with EPS growth coming in at a powerhouse 22%. With Aflac duck making the insurer one of the strongest brands around, shares trade with an amazingly cheap forward P/E of 10 and a dividend yield of 2.3%.

Risks to Consider: These stocks represent cyclically sensitive sectors of the wider economy. A significant slowdown would affect earnings, which would in turn put downward pressure on stock prices. Also, any wholesale miss in collective S&P 500 earnings would also put pressure on prices.

Action to Take –> Combined, these three stocks have an average forward P/E of 11.3 and a five-year average annual EPS growth rate of 17%. While I have my doubts about the S&P 500’s ability to generate that kind of earnings growth, these companies have solid operating histories, healthy balance sheets, skilled management and strong global franchises. Should their average forward P/E rise from 11.3 to 15 (still a discount to the index), the result would be a 12- to 18-month return of 35% before dividends.

An eccentric Texas woman who dodged the 2008 financial collapse says the market is ripe for a pullback. This is the same analyst who’s produced annual returns of up to 510% and has picked winning investments roughly 85% of the time. To learn how she’s protecting her portfolio today, click here.