Wall Street has been on a tumultuous ride lately on rising inflation. This is especially true, as rising prices tend to squeeze margins and erode corporate profits for the growth companies, which usually have higher valuations.
Notably, U.S. consumer prices climbed the most since 2009 in April while producer prices also expanded the most in a decade. If inflation remains high for a sustained period of time, it could trigger earlier-than-expected tightening policies from the Federal Reserve though the central bank views inflation as temporary (read: Inflation Zooms to 13-Year High: 5 Solid TIPS ETF Picks). Additionally, a flare-up in coronavirus cases in parts of Asia has sparked concerns over the pace of a global economic recovery. India, Japan and other parts of Southeast Asia are battling a fresh surge in cases and tightening restrictions, with relatively slow vaccine rollouts and delays in reopening the economy. Further, rounds of latest data have added to the chaos. Consumer confidence in early May tumbled with the preliminary reading for the University of Michigan Index of Consumer Sentiment dipping 6.2% from the month ago to 82.8 for May. U.S. retail sales were flat in April after jumping nearly 11% in March. Although U.S. industrial production rose 0.7% in April, it is down from a sharp increase of 2.4% in March. U.S. home construction also unexpectedly dropped a sharp 9.5% last month partially attributed to the delayed projects due to a surge in lumber prices and other supply constraints. However, the economy is showing solid economic recovery backed by huge infrastructure and stimulus packages, widening reach of vaccinations and a healing job market. The combination has powered activities across all sectors and categories, resulting in increased consumer spending. Americans are spending on big-ticket items such as vacations and weddings, companies are going on hiring sprees, and the transition to new technologies such as electric vehicles is accelerating. The U.S. economy grew 6.4% annually in the first quarter, representing the second-strongest increase since 2003 and is expected to top 7% this year, which would be the fastest since 1984, per several economists. This would follow the 3.5% contraction in 2020, which was the worst performance in 74 years. As the U.S. economy is gaining momentum, the dips might charge investors to snap up stocks on the cheap, though they remained wary over inflation fears. There are several stocks and ETFs that are at a bargain price now and investors could definitely look to these products for outsized gains over the longer term. How to Find Bargain ETFs?
Using our database, first we have selected ETFs with a Zacks Rank #1 (Strong Buy) or 2 (Buy). This is because these ranks suggest strengthening fundamentals and superior weighting methodologies that could allow them to move higher than their cousins in a booming market. Then, we narrowed down the list to funds having a lower P/E ratio than 25.16 for the broad market fund (SPY). Further, these ETFs have a lower expense ratio of below 0.50% and are among the popular options with AUM of at least $1 billion.
Here are the five ETFs that are currently undervalued and could generate solid returns in a rising stock market. SPDR S&P Biotech ETF ( XBI Quick Quote XBI - Free Report) – P/E Ratio: 9.25 With AUM of $6.8 billion, XBI provides equal-weight exposure across 191 biotechnology stocks by tracking the S&P Biotechnology Select Industry Index. It has 0.35% in expense ratio and a Zacks ETF Rank #2 (read: How Will Biotech ETFs React to These Q1 Earnings Releases?). SPDR S&P Bank ETF ( KBE Quick Quote KBE - Free Report) - P/E Ratio: 14.15 This fund offers equal-weight exposure to 96 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 73.3% share while thrifts & mortgage finance, diversified banks, asset management & custody banks and other diversified financial services take the remainder. It has amassed $4.11 billion in its asset base and charges 35 bps in annual fees. The ETF has a Zacks ETF Rank #2. SPDR Portfolio S&P 500 High Dividend ETF ( SPYD Quick Quote SPYD - Free Report) - P/E Ratio: 14.8 This fund provides exposure to stocks with a high level of dividend income and the opportunity for capital appreciation by tracking the S&P 500 High Dividend Index. Holding 78 stocks in its basket, the fund is well diversified across financials, real estate, energy and utilities. It has AUM of $3.7 billion and charges 7 bps in annual fees. The fund has a Zacks ETF Rank of #2. Vanguard Russell 2000 Value ETF ( VTWV Quick Quote VTWV - Free Report) - P/E Ratio: 14.9 This fund targets the small-cap value segment of the U.S market by tracking the Russell 2000 Value Index. It provides well-diversified exposure to a broad basket of 1551 stocks with about 26.5% of the portfolio is allotted to financials while consumer discretionary and industrials also take double-digit exposure each. The product has accumulated $1 billion in its asset base and charges 15 bps in annual fees. It has a Zacks ETF Rank #2 (read: A Guide to Small-Cap Value ETF Investing). SPDR S&P Retail ETF ( XRT Quick Quote XRT - Free Report) - P/E Ratio: 15.6 With AUM of $1.1 billion, this product targets the broad retail sector by tracking the S&P Retail Select Industry Index. It holds 101 securities in its basket with key holdings in apparel retail, Internet & direct marketing retail, automotive retail, and specialty stores. The fund charges 35 bps in annual fees and has a Zacks ETF Rank #2 (read: Retail ETFs in Focus Ahead of Big-Box Q1 Earnings). How to Find Bargain Stocks?
For this, we have used our
Zacks stock screener and have selected stocks with a Zacks Rank #1 or 2 and a VGM Score of B or better. Then we looked for stocks having a low P/E than the S&P 500 index ( 37.04), a double-digit estimated earnings growth rate for this year and belong to the top-ranked Zacks Industry (in the top 40%). Finally, we arrive at the five stocks that are cheap and have the potential to deliver higher returns. ArcelorMittal ( MT Quick Quote MT - Free Report) - P/E Ratio: 4.04 With a presence in more than 60 countries, this world’s leading steel and mining company operates a balanced portfolio of cost competitive steel plants across both the developed and developing world. The stock has an expected earnings growth rate of more than 100% for this year and belongs to the top-ranked industry ( top 12%). ArcelorMittal currently has a Zacks Rank #1 and a top VGM Score of A. You can see . the complete list of today’s Zacks #1 Rank stocks here Santander Consumer USA Holdings Inc. - P/E Ratio: 6.05 This is a technology-driven consumer finance company focused on vehicle finance and unsecured consumer lending products. It has an expected earnings growth rate of 111.5% for this year and falls in the top-ranked Zacks Industry ( top 8%). The stock carries a Zacks Rank #1 and has a VGM Score of A. Taylor Morrison Home Corporation ( TMHC Quick Quote TMHC - Free Report) - P/E Ratio: 6.05 This company is a homebuilder and land developer engaged in building single-family detached and attached homes for first-time buyers, move-up families to luxury and active adult customers. The stock has expected earnings growth of 161.2% for this year. It has Zacks Rank #2 and a VGM Score of A. It belongs to the top-ranked Industry ( top 16%). China Petroleum & Chemical Corporation ( SNP Quick Quote SNP - Free Report) - P/E Ratio: 6.85 It is one of the largest petroleum and petrochemical companies in Asia. The company’s earnings are expected to grow 86.9% for this year. The stock has a Zacks Rank #2 and a VGM Score of A. It belongs to a top-ranked Industry ( top 3%). Boise Cascade L.L.C. ( BCC Quick Quote BCC - Free Report) - P/E Ratio: 7.67 This company operates as a wood products manufacturer and building materials distributor. Its earnings are expected to grow 46.7% for this year. The stock has a Zacks Rank #1 and a VGM Score of B. It falls in in the top-ranked industry ( top 3%) (read: ETFs to Benefit from Soaring Lumber Prices). Want key ETF info delivered straight to your inbox?
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