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Buy the Dip With These ETFs & Stocks

Sweta Killa
The Zacks Analyst Blog Highlights: United Continental, JetBlue, Hawaiian, Ryanair and Alaska Air

Geopolitical concerns have once again hit the stock markets with the collapse of Turkish lira. The currency nosedived as much as 11% against the dollar in early trading today, after plummeting more than 20% on Friday. President Tayyip Erdogan's influence over monetary policy and a worsening U.S. relationship have ignited worries over the contagion spreading across the global market.

This is especially true as the S&P 500 and Dow Jones Industrial Average ended its five-week streak of gains, losing 0.2% and 0.6%, respectively. Though American companies have limited direct exposure to Turkey, the lira’s decline could take a toll on international growth, particularly emerging markets, thereby resulting in trade disruption. Additionally, escalating tensions between the world’s two largest economies are weighing on stocks (read: Low-Risk ETFs Taking Off on Rising Tariff Threats).

However, strong second-quarter earnings season and bouts of upbeat data are fueling optimism in the U.S. economy. Total earnings from 82.7% of the index’s total market capitalization that have reported so far are up 25% from the same period last year on 10.4% higher revenues, with 80.1% of the companies beating EPS estimates and 73.8% surpassing revenue estimates. Earnings and revenue growth as well as the proportion of companies beating EPS estimates are tracking above other recent periods.

The American economy has been on a solid growth path with GDP growth expanding 4.1% annually in the second quarter, representing the fastest pace of growth in nearly four years. The number is almost double the revised Q1 growth rate of 2.2%. With this, GDP grew 3.1% for the first half of the year and is poised to hit 3% annual growth for this year buoyed by historic tax cuts, infrastructure investment, higher government spending, deregulation, rising wages and record unemployment. Per Trump, “the United States is on track to hit the highest annual growth rate in over 13 years" (read: 5 ETFs to Buy as Q2 GDP Growth Hits 4-Year High of 4.1%).

Further, an impressive labor market, increase in wages, rise in consumer confidence and higher consumer spending are boosting economic activities. A rising rate scenario also signals a strengthening economy, which will spur further growth in the stock market.

Given the bullish fundamentals, the dips might charge up investors to snap up stocks and ETFs on the cheap for outsized gains in the coming weeks.

How to Find Bargain ETFs?

Using our database, first we 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 counterparts in a booming market. Then, we narrowed down the list to funds with lower P/E ratio than 17.87 for the broad market fund SPY.

Here are the five ETFs that are currently undervalued and could generate solid returns when the market regains strength.

Financial Select Sector SPDR XLF – P/E Ratio: 13.5

With AUM of $32.2 billion, this is an 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 and JPMorgan Chase JPM. The ETF charges 13 bps in annual fees and has a Zacks ETF Rank #2 (read: Buffett's Berkshire Buyback Plans Boost These ETFs).

First Trust Health Care AlphaDEX Fund FXH – P/E Ratio: 12.08

This fund follows an AlphaDEX methodology and ranks stocks in the healthcare space on various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This approach results in a basket of 77 stocks with none holding more than 2.75% of the assets. This fund has AUM of $1.1 billion in its asset base and charges 62 bps in fees annually. The fund has a Zacks ETF Rank #2 with a Medium risk outlook (read:  Healthcare ETF Hits New 52-Week High).

First Trust Small Cap Core AlphaDEX Fund FYX – P/E Ratio: 13.96

This ETF offers exposure to the small-cap segment of the broad U.S. market, holding well-diversified 526 stocks in its basket. It also follows an AlphaDEX methodology and charges 63 bps in fees from investors. The fund has amassed $750.9 million and has a Zacks ETF Rank #2 with a Medium risk outlook.

SPDR S&P Retail ETF XRT – P/E Ratio: 14.57

This product targets the retail sector and tracks the S&P Retail Select Industry Index, holding 89 securities in its basket, with none accounting for more than 1.9% of assets. The fund has amassed $650 million in its asset base and charges 35 bps in annual fees. It sports a Zacks ETF Rank #1 with a Medium risk outlook.

SPDR S&P 500 Value ETF SPYV – P/E Ratio: 14.67

This ETF offers pure exposure to the large-cap value segment of the U.S. equity market by tracking the S&P 500 Pure Value Index. Holding 3684 stocks in its basket, it is well spread out across components with none accounting for more than 3.64% share. The fund has amassed $1.4 billion in its asset base and charges 4 bps in annual fees. It has a Zacks ETF Rank #2 with a Medium risk outlook (read: Value ETFs Regain Momentum: Will This Last?).

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. The chances of outperformance are therefore high. Then we looked for stocks having a low P/E than the S&P 500 index (18.28), a double-digit estimated earnings growth rate for this year and a solid Industry Rank 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.

Micron Technology Inc MU - P/E Ratio: 4.36

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 136.29% for the fiscal year (ending August 2018). Micron Technology currently has a Zacks Rank #1 and a top VGM Score of A. It also boasts a solid Zacks Industry Rank in the top 1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

United States Steel Corporation X - P/E Ratio: 5.18

Based in Pittsburgh, PA, United States Steel is an integrated steel producer with major production operations in the United States and Central Europe. It has an expected earnings growth rate of 198.45% for this year and belongs to the top-ranked Zacks Industry (top 24%). The stock carries a Zacks Rank #2 and has a VGM Score of A.

Carrizo Oil & Gas, Inc. CRZO - P/E Ratio: 8.03

Based in Houston, TX, Carrizo Oil & Gas is a Houston-based energy company actively engaged in the exploration, development, exploitation and production of oil and natural gas, primarily in proven trends in the Barnett Shale area in North Texas and along the Texas and Louisiana onshore Gulf Coast regions. The company’s earnings are expected to grow 115.38% this year. The stock has a Zacks Rank #2 and a VGM Score of A. It falls under the top-ranked Zacks Industry (top 37%).

PulteGroup Inc. PHM - P/E Ratio: 8.27

Based in Atlanta, GA, PulteGroup is primarily engaged in the homebuilding business in the United States. The stock has an expected earnings growth of 57.99% for this year. It has Zacks Rank #2 and a VGM Score of A. It belongs to the top-ranked Zacks Industry (top 28%) (read: Housing ETFs Seesaw Between Poor Sales Data & Solid Earnings).

Huntsman Corporation HUN - P/E Ratio: 9.02

Based in Woodlands, TX, Huntsman is among the world's largest global manufacturers of differentiated and commodity chemical products for a variety of industrial and consumer applications. Its earnings are expected to grow 41.94% this year. The stock has a Zacks Rank #1 and a VGM Score of A. It falls in the top-ranked Zacks Industry (top 37%).

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