Wall Street has been on a tumultuous ride this quarter as higher interest rates, political malaise in Europe, U.S.–China trade woes and threats of global slowdown have led to market gyrations. A flattening U.S. yield curve and decline in oil price have added to the woes.
However, the Fed’s dovish view, an accelerating economy, fresh cuts in oil supply by OPEC and its allies, and holiday optimism are expected to drive stocks higher (read: Is Fresh OPEC+ Output Cut Enough to Boost Oil & Energy ETFs?). Powell recently said that interest rates were "just below" the level that would be neutral for the economy — meaning they will neither speed up nor slow down economic growth. Additionally, the subsequent minutes from the central bank's latest meeting suggest that the Fed will likely raise rates this month but may stall rate hikes next year. Additionally, the U.S. economy has been on a solid growth track with robust job creation, strong GDP growth, a 50-year low unemployment rate, solid wage gains, and rising consumer and business confidence. VIDEO
National Retail Federation (NRF) expects holiday sales — excluding automobiles, gasoline and restaurants — to grow 4.3-4.8% for November and December to $717.45-$720.89 billion. This is higher than the five-year average of 3.9% but lower than last year’s growth of 5.3%. Notably, Adobe expects e-commerce sales to rise 14.8% this holiday season to $124.1 billion (read:
Top ETF Deals for This Holiday Season). If these weren’t enough, reports on progress in U.S.-China trade relation boosted investors’ optimism. This is especially true as Beijing indicated that it will ease its "Made in China 2025" industrial policy while Trump said that talks were already underway and that China was buying a "tremendous amount" of U.S. soybeans. Given the bullish fundamentals, the dips might charge up investors to snap up stocks and ETFs on the cheap for outsized gains heading into Christmas. 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 lower P/E ratio than 18.28 for the broad market fund ( SPY - Free Report) . Here are the five ETFs that are currently undervalued and could generate solid returns in a rising stock market. Fidelity MSCI Telecommunication Services Index ETF ( FCOM - Free Report) – P/E Ratio: 8.35 This fund targets the communication services sector in the U.S. equity market by tracking the MSCI USA IMI Communication Services 25/50 Index. It holds 107 stocks in its basket with heavy concentration on the top firms. Interactive media & services takes the top spot at nearly 39% while diversified telecommunication services, entertainment, and media round off the next three spots. The product has amassed $184 million in its asset base and trades in average daily volume of 66,000 shares. It charges 8 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook. First Trust Utilities AlphaDEX Fund ( FXU - Free Report) - P/E Ratio: 11.28 This product follows the StrataQuant Utilities Index, holding 35 securities in its basket with each accounting for less than 6.4% of the total assets. The fund has accumulated $407.6 million in its asset base and trades in a good volume of about 212,000 shares a day. It charges 62 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook. Invesco S&P 500 Enhanced Value ETF ( SPVU - Free Report) - P/E Ratio: 12.17 This fund follows the S&P 500 Enhanced Value Index, which measures the performance of stocks in the S&P 500 index that have the highest value score. It holds 98 stocks in its basket with none accounting for more than 6.4% share. Financials is the top sector at 33.8%, while communication services, healthcare and consumer staples round off the next spots with double-digit exposure each. The ETF has accumulated $21.2 million in AUM while trades in light average daily volume of 4,000 shares. It charges 13 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook (read: 5 Low P/E Lucrative Value ETF Picks). SPDR S&P Insurance ETF ( KIE - Free Report) - P/E Ratio: 12.17 This fund follows the S&P Insurance Select Industry Index, holding 49 stocks in its basket, with none accounting for no more than 2.7% share. About 41.8% of the portfolio is allocated to the property and casualty insurance, while life & health insurance accounts for 25% share. The ETF has managed $708.7 million in its asset base and trades in a good average daily volume of about 286,000 shares. The product has an expense ratio of 0.35% and a Zacks ETF Rank #1 with a Medium risk outlook. SPDR S&P Pharmaceuticals ETF ( XPH - Free Report) - P/E Ratio: 12.97 This fund provides exposure to pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of $292.9 million, it trades in good volume of around 96,000 shares a day and charges 35 bps in fees a year. In total, the product holds 44 securities with none making up for more than 5.6% share each. The product has a Zacks ETF Rank #2, with a High risk outlook. 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 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 low P/E than the S&P 500 index ( 21.33), 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 with lower volatility. Kemet Corporation ( KEM - Free Report) - P/E Ratio: 5.63 This is the world's largest manufacturer of solid tantalum capacitors and one of the world's largest manufacturer of multilayer ceramic capacitors. The stock has an expected earnings growth rate of 90.86% for the fiscal year (ending Mar 2019) and belongs to the top-ranked industry ( top 40%). Kemet Corporation 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 Unum Group ( UNM - Free Report) - P/E Ratio: 5.80 This is the industry leader in disability income protection and one of the top providers of supplemental benefits in the nation. It has an expected earnings growth of 21.68% for this year and falls in the top-ranked Zacks Industry ( top 4%). The stock carries a Zacks Rank #2 and has a VGM Score of A (read: Quality ETFs & Stocks to Outperform Amid Volatility). Manulife Financial Corp ( MFC - Free Report) - P/E Ratio: 7.20 This company is engaged in providing financial protection products and investment management services to individuals, families, businesses and groups in selected international markets. The stock has an expected earnings growth of 21.64% for this year. It has Zacks Rank #2 and a VGM Score of A. It belongs to the top-ranked Industry ( top 8%). Sony Corporation ( SNE - Free Report) - P/E Ratio: 11.60 This company develops and manufactures consumer and industrial electronic equipment. The company’s earnings are expected to grow 37.99% for the fiscal year (ending Mar 2019). The stock has a Zacks Rank #2 and a VGM Score of A. It belongs to a top-ranked Industry ( top 14%). Biogen Inc. ( BIIB - Free Report) - P/E Ratio: 12.47 This is a leading biopharmaceutical company engaged in the research, development and marketing of targeted therapies for the treatment of cancer, autoimmune and inflammatory diseases. Its earnings are expected to grow 18.62% for this year. The stock has a Zacks Rank #2 and a VGM Score of B. It falls in in the top-ranked industry ( top 24%) (read: Top Sector ETFs of 2018). Want key ETF info delivered straight to your inbox? Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>