A string of woes have held back the U.S. market this year, with the S&P 500 adding just about 2.5% so far. Global growth issues, Fed lift-off worries and a surging greenback are coming in the way of the markets’ outperformance. While many may hope for a sharp revival in the market in 2016 following such a slow year, Goldman Sachs’ latest prediction points to the same story next year.
Considering dividends, Goldman estimates stocks to return merely 3% next year. The renowned investment banker also raised overvaluation concerns over the U.S. market. This statement very well motivates investors to search for a value sector, if there is any left at all. A value play is especially required given the broad-based revenue weakness noticed in Q3, not only among multinationals but also within small-cap companies.
After all, the low valuation might lead investors to some quality sector buys at best prices. No doubt, with all the major indices trading at around all-time highs, it is hard to find value plays at home. But for those investors ardently seeking undervalued sectors, there are still a few hidden treasures out there.
While several indicators are used to find out any stock or sector’s valuation status, price-to-earnings ratio or P/E has been the most widespread. We have identified four sector picks having the lowest forward P/E ratio for next year’s earnings in the pack of 16 S&P sectors classified by Zacks and detail the related ETFs to play those sectors’ undervalued status.
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 made the first half of 2015 the best six months in a decade for auto sales. Though the Fed is poised to raise key interest rates in December, it will opt for a slower rate hike trajectory. So, auto loans are presently feared to get pricy.
Despite strong fundamentals, the sector has a P/E ratio of 9.9 times for 2015 and 8.8 times for 2016, the lowest in the S&P universe, as per the Zacks Earnings Trend issued on November 18 (read: Impressive Auto Earnings Put This Car ETF in Focus).
Investors should note that the P/E of the auto industry trades at a 43.8% discount to the current year P/E of S&P and 45.7% discount to the next year P/E. The space is down 12.1% so far this year, implying that the auto stocks are yet to capitalize on the sector’s momentum.
Investors should note that there is only one pure play CARZ in the space that provides global exposure to nearly 40 auto stocks by tracking the NASDAQ OMX Global Auto Index. CARZ has a Zacks ETF Rank #2 (Buy) and is up 1.4% so far this year (as of December 1, 2015).
Transportation – iShares Dow Jones Transportation Average Fund (IYT)
