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4 Secure Stocks to Combat Fed's Overvaluation Fears

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Stocks moved lower on Monday after some members of the Federal Reserve opined that equity markets were significantly overvalued. Minutes from the central bank’s March meeting also affected investor sentiment because it revealed that the Fed was considering reducing the size of its balance sheet.

But what caught the attention of investors and market watchers alike was the concern expressed on the valuation front. Meanwhile, the “Trump Rally” has likely lost steam following the new administration’s abortive attempt to push through a new healthcare bill. This failure has also called into question Trump’s ability to push through his other policy initiatives.

Since both these factors have dented investor confidence, picking value stocks with low beta looks like a smart option at this point. Beta measures the tendency of a stock's returns to respond to market swings. Low correlation stocks provide protection during turbulent times as they are less prone to day-to-day fluctuations

Fed Minutes Raise Valuation Concerns

Among other matters, March’s Fed Minutes highlighted members’ concerns that stock prices were substantially overvalued. According to the minutes, some central bank members were of the opinion that equity prices were high compared to widely use valuation metrics. For instance, certain gauges, such as price to earnings ratios have soared above their historical averages.

This is not the first time that the central bank, and in particular, the Fed Chair has raised an alarm over stock valuations. In Jun 2016, Janet Yellen told a Senate panel that valuations were a matter of concern because of investor pessimism about corporate earnings. Earlier, in May 2015, Yellen had highlighted similar fears when the Fed was considering its first rate hike in a decade. It is likely that such concerns have been flagged by the Fed Chair this time as well.

Historical Validity, Trump’s Policy Initiatives

But how far are the Fed’s concerns about exorbitant stock prices valid? Traders were quick to discount such fears, much in the same way that they did when former Fed Chair Alan Greenspan talked about the markets’ “irrational exuberance” in Dec 1996, three years before the dotcom market hit its peak. A closer examination of Fed minutes from 1996 reveals that concerns about valuations have often been borne out by actual events, according to data analytics company Kensho.

Additionally, skepticism over Trump’s ability to push through industry friendly measures has been adding to investors’ worries. Trump’s failure to push through the new healthcare bill has already queered the pitch for his policy proposals. However, he has been quick to shift the narrative toward tax reforms. But now House Speaker Paul Ryan has indicated that such changes may not take place in a hurry. Speaking on Washington on Wednesday, Ryan said that tax reforms could take even longer than replacing the ACA with a new healthcare law.

Our Choices

The central bank’s concerns about stock valuations have come at a point when such a feeling has begun to gain currency among a section of investors. Additionally, confidence about Trump’s ability to push through industry friendly measures has begun to wane.

In such a situation, it makes good sense to pick value stocks with low beta, which could protect gains made recently. Our selection is also backed by a good Zacks Value Score and Zacks Rank.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.

Tech Data Corporation (TECD - Free Report) is a leading provider of internet technology products, logistics management and other value-added services.

Tech Data holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’ The stock has a beta value of 0.88. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 9.65, lower than the industry average of 11.95. It has a PEG ratio of 0.42, lower than the industry average of 1.23.The stock has returned 5.6% year to date, outperforming the Zacks Retail - Computer Hardware Market sector, which has gained 5.5% over the same period.

Sinopec Shanghai Petrochemical Company Ltd. (SHI - Free Report) is China's largest petrochemicals company.

Sinopec holds a Value Style Score of ‘A.’ The stock has a beta value of 0.68 and a P/E (F1) of 8.01x, compared to the industry average of 16.93. It has a PEG ratio of 0.56, lower than the industry average of 1.83. The stock has returned 3.9% year to date, underperforming the Zacks Chemical - Diversified Market sector, which has gained 8.3% over the same period. This provides a good opportunity to buy the stock given that there is significant upside potential. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Michaels Companies, Inc. (MIK - Free Report) is a specialty retailer of arts and crafts.

Michaels holds a Zacks Rank #2 (Buy) has a Value Style Score of ‘A.’ The stock has a beta value of 0.96 and a P/E (F1) of 10.58x, lower than the industry average of 13.45. It has a PEG ratio of 0.59, lower than the industry average of 1.14. The stock has returned 9.8% over the last six months, outperforming the Zacks Retail - Miscellaneous Market sector, which has lost 1.2% over the same period.

J Sainsbury plc (JSAIY - Free Report) is a leading UK food retailer with interests in financial services.

J Sainsbury holds a Zacks Rank #2 and has a Value Style Score of ‘A’. The stock has a beta value of 0.86 and a P/E (F1) of 13.80x, lower than the industry average of 16.57. The stock has returned 6.8% year to date, outperforming the Zacks Retail - Supermarkets Market sector, which has gained 1.6% over the same period.

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