Back to top
Read MoreHide Full Article

Wall Street officially ranks among the world’s most expensive markets on a number of metrics. In fact, two-third of money managers finds the U.S. stock market’s recent record run unsettling. The dizzying ascent of U.S. stocks as a result of lofty valuations might sooner than later threaten to spark a major sell-off.

In such an overvalued market, it will be enticing to find stocks that are perceived to be “bargains” or are undervalued. These stocks are fundamentally sound to withstand any market upheaval and at same time will help investors make money by buying before the impending rally.

Wall Street Ranks Among the Globe’s Most Expensive

Investors continue to fret over lofty valuations on Wall Street. The U.S. stock market has turned out to be the least reasonably priced equity market across the globe, coming in last among the 40 counties and regions surveyed on a variety of metrics by StarCapital Research. But, an undervalued equity market has achieved better returns in the future compared to their overvalued foils.  The following table shows how much the U.S. stock market is overvalued compared to other markets around the world:

OVERALL RANK (TOP 5 & BOTTOM 5 CONSIDERED)COUNTRYCAPEP/E
1South Korea15.312.9
2Austria17.216.6
3Czech Republic8.812.9
4Hungary13.610.4
5Italy14.638.8
36Indonesia19.721.1
37India20.622.8
38Philippines2220.6
39Belgium22.927.6
40U.S.2822.4

Source: StarCapital Research

The U.S. stock market’s cyclically-adjusted price-to-earnings (CAPE) ratio, which compares decade-long stock prices with corporate earnings, is 28. This is the third highest among the countries compared, cheaper only to Denmark (36.1) and Ireland (34.5). Historically, the CAPE ratio at current levels in the U.S. has preceded significant market declines.

The price-to-earnings ratio in the U.S. comes in at 22.4, the tenth-highest in the world if we exclude the broader segment of developed Europe. Even though such a ratio is below the U.K.’s 31 and India’s 22.8, it is way above China’s 7.4 and Russia’s 7.1. Both these nations are considered to be the most inexpensive.

The U.S., in the meanwhile, has a price-to-book ratio 3.1, the second highest among the 40 regions, while on a price-to-sales ratio basis, the nation is the seventh most expensive country in the world, with a reading of 2.0.

Two-Third Investors Think U.S. Stocks Are Overvalued

Only 36% of investment managers find the U.S. stock market to be fairly valued at current levels or undervalued as per a quarterly investment manager survey performed by Northern Trust Asset Management. Such a reading marks the lowest since the survey began in the third quarter of 2008. On the other hand, two-third of investors – 65% – believes that the U.S. market is overvalued. This is the highest percentage for overvaluation on record.

The survey, further, figured out that only 6% of investors considered consumer staples to be undervalued, while 15% said the same for technology. Financial, energy and health care sectors have a little more room to grow, with 39%, 32% and 32% respondents, respectively, believing that stocks are undervalued.

With the Dow Jones, the S&P 500 and the Nasdaq hitting a series of record highs this year, experts are in fact contemplating investments overseas. A whopping 86% of investment managers believe that the European stocks are undervalued, while 88% feel that the emerging market equities are undervalued or fairly priced.

But, what has driven the U.S. stock market to record levels and eventually resulting in pricey stocks? A big chunk of gains came from the so-called FAANG stocks that comprise tech companies like Facebook Inc (FB - Free Report) , Apple Inc. (AAPL - Free Report) and Alphabet Inc (GOOGL - Free Report) , as well as consumer discretionary stocks like Amazon.com, Inc. (AMZN - Free Report) and Netflix, Inc. (NFLX - Free Report) . Significant improvement in corporate earnings is also cited to be the reason for the market’s recent gains.

“FAANGtastic five” – Gains Traction

If we consider the “FAANGtastic five” – each of them gained between 25% and 52% in the year-to-date period. Amazon, in particular, at one point topped the $1000-a-share level, highlighting the stellar show put up by tech stocks in the said period. Internet and tech companies scaled higher on hopes that potential tax reforms will get eventually implemented.

Many tech companies have, in fact, boosted earnings without the help of government policies. Notably, Apple is riding high on growing demand for smartphones and web-based services.

However, as chances of Trump getting his policies through Congress ebbed, gains have continued on the back of solid corporate earnings.

Q2 Earnings Upbeat

Improved second-quarter economic growth, strong manufacturing and service surveys, and a moderate uptick in wage growth helped Corporate America post relatively high profit margins in Q2. We now have results from 97 S&P 500 members. Total earnings for these companies are up 8.4% from the same period last year on 5.1% higher revenues, with 78.4% beating EPS estimates and 72.2% beating revenue estimates.

According to estimates, total second-quarter earnings for the S&P 500 cohort are expected to be up 8.6% from same period last year on 4.7% higher revenues. This would follow earnings growth of 13.3% in Q1 on 7% revenue growth, the highest in at least two years (read more: Four Takeaways from the Q2 Earnings Season).

5 Best Value Stocks to Counter An Overvalued Market

It’s no secret that the U.S. stocks are mostly overvalued, which raises concerns of a possible downturn. Given this uncertainty, it will be wise to invest in value stocks. Value investors look for volatile times to pick up stocks at a discount, which are at the same time fundamentally strong to withstand any economic downturn.

Thanks to our new style score system, we have been able to identify five value stocks. Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best opportunities in the value investing space.

Delta Air Lines, Inc. (DAL - Free Report) provides scheduled air transportation for passengers and cargo throughout the U.S. and across the world. The company has a Zacks Rank #1 and a Value Score of ‘A’. Delta Air Lines has a price-to-earnings ratio (P/E) of 9.48, compared with 14.90 for the industry. The company’s estimated growth rate for this year is 3.6%, in contrast to its industry’s projected decline of 4%.

Gulfport Energy Corporation (GPOR - Free Report) is an oil and natural gas exploration and production company. The company’s properties are located in the Utica Shale in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay (WCBB) and Hackberry fields. Gulfport Energy has a Zacks Rank #2 and a Value Score of ‘A’. The company has a price-to-earnings ratio (P/E) of 9.60, compared with 30.80 for the industry. The company’s estimated growth rate for this year is 50.3%, higher than its industry’s projected gain of 35.4%.

Trinseo S.A. (TSE - Free Report) manufactures and markets synthetic rubber, latex binders, and plastic products in all parts of the world, including the U.S. The company has a Zacks Rank #2 and a Value Score of ‘A’. It has a price-to-earnings ratio (P/E) of 9.08, compared with 18 for the industry. The company’s estimated growth rate for this year is 5.4%, in contrast to its industry’s projected decline of 4.8%.

Ternium S.A. (TX - Free Report) manufactures and processes various steel products in all parts of the world, including the U.S. The company sports a Zacks Rank #1 and a Value Score of ‘A’. It has a price-to-earnings ratio (P/E) of 7.79, compared with 14.40 its industry. The company’s estimated growth rate for this year is a solid 27.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Two Harbors Investment Corp (TWO - Free Report) is a real estate investment trust. The company has a Zacks Rank #2 and a Value Score of ‘B’. It has a price-to-earnings ratio (P/E) of 9.15, compared with 9.70 for the industry. Two Harbors’ estimated growth rate for this year is 19.4%, in contrast to its industry’s projected decline of 2.8%.

More Stock News: This Is Bigger than the iPhone!                   

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.  Click here for the 6 trades >>



More from Zacks Analyst Blog

You May Like