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Time for Undervalued Sector ETFs as Stocks Hit All-Time High?

Sanghamitra Saha

The S&P 500 touched an all-time high again on Oct 28, the Dow Jones is off 1.3% from its all-time high and the Nasdaq is just 0.2% below its record high. Trade optimism, rate cut hopes, holiday season euphoria and a decent earnings season have led to the surge.

However, the rally may trigger some overvaluation concerns as recessionary fears are rife. Personal saving rate in the United States has been on a decline since February this year. The manufacturing purchasing managers’ index dropped below the critical 50 level in September to 47.8.

A year ago, “Wall Street analysts expected S&P 500 Index operating profits to rise 10% this year. But now they look for just a 1.9% gain, and foresee profits falling 4.1% in the third quarter from a year ago, according to FactSet data,” as quoted on Bloomberg. Job growth is also exhibiting a downtrend “with an average of 154,000 new monthly payroll jobs in the last six months, compared with 204,000 in the previous half-year period.”

Against this backdrop, investors might want to know which sectors are on sale even in a pricey market and if those can be ridden for gains.

Auto, Tires and Trucks – 11.14x

The industry comes from a top-ranked Zacks industry (top 34%). Many of the sector behemoths have a strong Zacks Rank. Tesla TSLA came up with a blowout quarter. Though the full-year profit-outlook was cut, Ford F outpaced Q3 earnings and sales estimates.

Plus, signs of improvement in the U.S.-China trade relation are a positive for the sector. Notably, per Germany’s Center for Automotive Research (CAR), the U.S.-China tariff war could lead to a sales loss of $770 billion over the next five years.

First Trust NASDAQ Global Auto Index Fund CARZ has a Zacks Rank #3 (Hold) with a High-risk outlook. The fund gained 1.8% on Oct 28.

Finance – 12.32x

U.S. benchmark treasury yields rose to 1.85% on Oct 28 from 1.65% recorded at the start of the month. Brexit fears ebbed as the European Union granted the United Kingdom “an extension for rounding out its Brexit.” Corporate earnings are also coming in better than expected.

Meanwhile, short-term rates remained subdued due to increased chances of a Fed rate cut this month. This has resulted in the steepening of the yield curve, which is great for financial ETFs.

Financial Select Sector SPDR Fund XLF has a Zacks Rank #2 (Buy) with a Medium risk outlook. The fund added about 0.5% on Oct 28 (read: Financial ETFs Gain Despite Mixed Earnings).

Oils and Energy – 13.29x

Oil and energy stocks have been volatile, mainly on global growth concerns. However, chances that OPEC and its allies will prolong their output cuts in order to stabilize prices could shore up oil prices in the near term (read: 3 Top Sector ETFs of Last Week).

But we do not foresee a material uptick in oil prices in the coming days as prolonged output cuts by the OPEC and non-OPEC countries have failed to boost oil prices substantially in the past.

But companies in the refining segment should benefit from lower oil prices as crude is one of their main input costs. After taking crude, refiners process it to the finished product gasoline. VanEck Vectors Oil Refiners ETF CRAK advanced 1% on Oct 28.

Transportation – 13.58x

Decent leisure and business travel demand as well as low fuel prices work in favor of the sector. Some upbeat earnings releases from the likes of United Airlines UAL, JetBlue Airways JBLU, Spirit Airlines SAVE and Southwest Airlines LUV boosts optimism. U.S. Global Jets ETF JETS has a Zacks Rank #3 and was up more than 0.7% on Oct 28.

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
 
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
 
United Airlines Holdings Inc (UAL) : Free Stock Analysis Report
 
Spirit Airlines, Inc. (SAVE) : Free Stock Analysis Report
 
U.S. Global Jets ETF (JETS): ETF Research Reports
 
Financial Select Sector SPDR Fund (XLF): ETF Research Reports
 
First Trust NASDAQ Global Auto Index Fund (CARZ): ETF Research Reports
 
VanEck Vectors Oil Refiners ETF (CRAK): ETF Research Reports
 
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