A string of woes hurt the U.S. market momentum in the first quarter of 2016 with the S&P 500 barely adding gains thanks to global growth issues and persistent worries in the oil patch. Many, including the Republican favorite for president, Donald Trump, believe that the U.S. economy may bump into a recession due to an overvalued stock market, high unemployment and “an economic bubble.”
While we are not sure if the economy will encounter a recession, the earnings recession has already taken for a grip over the U.S. economy. Earnings estimates have been downhill constantly over the last few of years and this downing trend is very much present in Q1 too (read: Earnings Recession Put These ETFs in Focus).
The earnings of the S&P 500 index is likely to decline 10% in the first quarter while revenues are expected to fall 1.4% as per the Zacks Earnings Trends issued on March 29, 2016. The earnings and revenue expectations are projected to fall 4.5% and 1% respectively in the second quarter. However, things will take a positive turn from the third quarter.
In such an earnings scenario, overvaluation issues can be brutal. And some market experts’ fears of inflated stocks also seem true. The S&P 500 is down just 3.2% (on April 4, 2016) from its 52-week high. Given this, investors are likely to be motivated to search for a value sector. Investors keenly seeking undervalued sectors would be glad to know that there are still a few hidden treasures in this otherwise-overstated market.
Auto – First Trust NASDAQ Global Auto ETF (CARZ)
The U.S. automotive industry is on high gear. A strong labor market, persistently lower energy prices, increasing aging vehicles on road and a still-low interest rate environment are favoring auto sales (read: ETFs to Gain or Lose After Strong Jobs Report).
Despite strong fundamentals, the sector has a P/E ratio of 8.5 times for 2016 and 8.1 times for 2017, the lowest in the S&P universe, as per the Zacks Earnings Trend issued on March 29. Investors should note that the P/E of the auto industry trades at a 51.1% discount to the current-year P/E of S&P and at a 47.4% discount to the next-year P/E. The auto sector is expected to post 21.1% earnings growth in Q1 on 1.9% revenue growth.
Investors should note that there is only one pure play CARZ in the space that provides global exposure to nearly 40 auto stocks. CARZ has a Zacks ETF Rank #3 (Hold) and is down 13.6% so far this year (as of April 5, 2015), implying that the auto stocks are yet to capitalize on the sector’s momentum.
Transportation – SPDR S&P Transportation ETF (XTN)
This is a risky play as the transportation ETF XTH has a Zacks ETF Rank #4 (Sell). However, with oil prices southward and touching the $35 level, transportation ETFs like XTN should get a boost (read: Profit From Sub-$40 Oil with These ETFs).
Plus, the transportation sector is among the few (under the coverage of the 16 sectors of the S&P 500 index) which is expected to post earnings growth this season. The current and the next-year P/Es for the sector are 12.1 and 11.6 times respectively, reflecting a 30.5% and 24.7% discount to the S&P 500. One way to play this trend is with XTN. The fund is up 5.3% so far this year (as of April 5, 2016).
Finance – KBW High Dividend Yield Financial Portfolio (KBWD)
While the operating backdrop of financial stocks has improved a lot from the recession-cursed phase, two potential rate hikes (as indicated by the Fed as of now) should boost the financial ETFs.
The space has a current-year P/E of 12.6 times, reflecting a 27.6% discount to the S&P while its next-year P/E stands at 11.5 times, a 25.3% discount to the S&P 500. The space has lost 6.5% so far this year (as of March 29, 2016).
While there are plenty of financial ETFs, investors can take a look at the Zacks Rank #2 (Buy) KBWD. The fund has exposure in U.S. financial services and products, including banking, insurance and diversified financial services. The fund yields 8.79% annually and is off just 2.5% so far this year (as of April 5, 2016)
Medical – ALPS Medical Breakthroughs ETF (SBIO)
The medical sector has been sluggish lately, especially the biotech corner. Risk-off sentiments beat the lure of biotech sector’s sentiments, making this a worthwhile investment at the current level (read: Biotech ETFs Hit 52-Week Lows: Time to Buy?).
The space has a current-year P/E of 15.4 times, reflecting an 11.5% discount to the S&P while it’s next-year P/E stands at 13.8 times, a 10.4% discount to the S&P 500. Shares of the sector have tumbled 11.4% so far this year (as of March 29, 2016). Biotech sector ETF SBIO has dropped 27.3% so far this year (as of April 5, 2016) but has advanced about 6% in the last five trading days. The fund has a P/E (ttm) of 18 times.
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