After a blockbuster start to 2018, the Wall Street once again saw a tumultuous ride last week thanks to a tech selloff, Fed rates hike and trade war fears. In particular, the major bourses suffered their worst week in more than two years with the Dow Jones Industrial Average and the S&P 500 tumbling 5.7% and 5.9%, respectively. Meanwhile, the Nasdaq Composite Index dropped 6.5% (read: Play These Inverse ETFs to Profit From Market Bloodbath).
The massive decline came in late last week following Trump’s announcement that he is seeking to impose a tariff of up to $60 billion on Chinese imports in response to intellectual property theft from U.S. businesses. In response, China seems to be preparing for retaliation with a proposed list of 128 U.S. products worth $3 billion. This has made investors jittery, leading to risk-off trading, as tariffs will spur retaliation from China, triggering a global trade war between the world’s two largest economies.
However, the fear seems to have abated following the latest reports from Wall Street Journal that both the United States and China have started negotiating to improve American access to Chinese markets. Additionally, Trump exempted South Korea from steel tariffs levied earlier this month, suggesting that the President is using a fierce approach for more negotiating power rather than any real intention to start a global trade war. Given this, U.S. stocks rebounded strongly at the start of this week with the S&P 500 and Dow Jones gaining nearly 2% at the time of writing.
Further, strong corporate earnings, optimism surrounding Trump’s tax cut policies, pick-up in growth in developed and developing economies, robust job gains, growing wages, increasing consumer spending, a recovering housing market and a record level of consumer confidence will continue to drive the nine-year bulls (read: Best Performing ETFs of 9-Year Bull Run).
Given the bullish fundamentals, the selloff seen last week might charge up investors to snap up ETFs and stocks on the cheap for outsized gains in the coming weeks.
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 lead higher than their cousins in a booming market. Then, we narrowed down the list to funds having a lower P/E ratio than 18.67 for the broad market fund (SPY - Free Report) .
Here are the five ETFs that are currently undervalued and could generate solid returns when the stock market resumes its rally.
U.S. Global Jets ETF (JETS - Free Report) – P/E Ratio: 12.54
This fund provides exposure to the global airline industry, including airline operators and manufacturers, by tracking the U.S. Global Jets Index. In total, the product holds 33 securities that are heavily concentrated on the top four firms with a double-digit allocation each. The fund has gathered $104.9 million in its asset base and charges investors 60 bps in annual fees. It has a Zacks Rank #2 (read: all the Industrial ETFs here).
Guggenheim S&P 500 Pure Value ETF (RPV - Free Report) – P/E Ratio: 13.75
This ETF offers exposure to the value corner of the broad market by tracking the S&P 500 Pure Value Index. It holds 111 securities in its basket with none accounting for more than 2.43% share. The fund has amassed $858.3 million in its asset base and charges 35 bps in annual fees. It has a Zacks ETF Rank #2.
First Trust Consumer Discretionary AlphaDEX Fund (FXD - Free Report) - P/E Ratio: 14.06
This ETF offers exposure to the consumer discretionary sector, holding well-diversified 114 stocks in its basket. It follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom-ranked 25%. The fund has amassed $496.8 million in its asset base and charges a little higher 63 bps in annual fees. It has a Zacks ETF Rank #2 (read: 8 Top-Ranked Low P/E Cyclical Sector ETFs to Buy Right Now).
Financial Select Sector SPDR (XLF - Free Report) – P/E Ratio: 14.23
With AUM of $31.9 billion, this is the ultra-popular ETF targeting the broad financial segment and follows the Financial Select Sector Index. It holds 68 stocks in its basket, with double-digit allocation to the top two firms Berkshire Hathaway Inc. (BRK.B - Free Report) and JPMorgan Chase (JPM - Free Report) . The ETF charges 13 bps in annual fees and has a Zacks ETF Rank #1.
SPDR S&P Retail ETF (XRT - Free Report) - P/E Ratio: 15.12
This product targets the retail segment of the broad U.S. market. It tracks the S&P Retail Select Industry Index, holding well-diversified 85 securities in its basket. The fund has amassed $546.6 million in its asset base and charges 35 bps in annual fees. The fund has a Zacks ETF Rank #1 (read: 5 ETFs to Profit From Fed Activity & Guidance).
How to Find Bargain Stocks?
For this, we have used a Zacks Stock Screener to select stocks with a Zacks Rank #1 or 2 and a VGM Style Score of B or better. A top rank suggests rising earnings estimates, which indicate an optimistic view on earnings by analysts and hence higher chances of outperformance. Then we looked for stocks having a lower P/E than the S&P 500 index (16.5), a double-digit estimated earnings growth rate for this year and a top-ranked Zacks industry (top 40%).
Finally, we arrived at five stocks that are cheap and have the potential to deliver higher returns.
Micron Technology Inc (MU - Free Report) - P/E Ratio: 5.21
Based in Boise, ID, Micron Technology is one of the leading worldwide providers of semiconductor memory solutions. The stock has an expected earnings growth rate of 114.52% for the fiscal year (ending August 2018). Micron Technology currently has a Zacks Rank #1 and a top VGM Score of A. It falls under the top-ranked Zacks industry (top 1%). You can seethe complete list of today’s Zacks #1 Rank stocks here.
Tyson Foods Inc. (TSN - Free Report) - P/E Ratio: 10.75
Based in Springdale, AR, Tyson Foods is one of the world’s largest producers of chicken, beef, pork and prepared foods, offering a wide range of protein-based and prepared foods products. It has an expected earnings growth of 25.24% for the year (ending September 2018) and belongs to a top-ranked Zacks industry (top 2%). The stock carries a Zacks Rank #1 and has a VGM Score of B.
United Rentals, Inc. (URI - Free Report) - P/E Ratio: 11.39
Based in Stamford, CT, United Rentals operates as an equipment rental company. Its earnings are expected to grow 44.38% for this year. The stock has a Zacks Rank #2 and a VGM Score of A. It falls under a top-ranked Zacks industry (top 10%).
Lam Research Corporation (LRCX - Free Report) - P/E Ratio: 12.09
Based in Fremont, CA, Lam Research designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits worldwide. It has an expected earnings growth of 67.95% for the year (ending June 2018) and belongs to a top-ranked Zacks industry (top 2%). The stock carries a Zacks Rank #1 and has a VGM Score of B (read: 3 Top Ranked Sector ETFs to Buy as Fed Hikes Rates).
DXC Technology Company DXC - P/E Ratio: 12.90
Based in Tysons, VA, DXC Technology provides information technology services and solutions primarily in North America, Europe, Asia and Australia. The company’s earnings are expected to grow 14.96% for the year (ending March 2019). The stock has a Zacks Rank #2 and a VGM Score of A. It belongs to a solid Zacks industry within the top 22% ranking.
The above-mentioned products are compelling options for investors when the market rebounds as these appear undervalued than the overall market at the current levels.
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