5 Great Value Picks For The World's Priciest Market

Wall Street officially ranks among the world’s most expensive markets on a number of metrics. In fact, two-third of money managers finds the U.S. stock market’s recent record run unsettling. The dizzying ascent of U.S. stocks as a result of lofty valuations might sooner than later threaten to spark a major sell-off.

In such an overvalued market, it will be enticing to find stocks that are perceived to be “bargains” or are undervalued. These stocks are fundamentally sound to withstand any market upheaval and at same time will help investors make money by buying before the impending rally.

Wall Street Ranks Among the Globe’s Most Expensive

Investors continue to fret over lofty valuations on Wall Street. The U.S. stock market has turned out to be the least reasonably priced equity market across the globe, coming in last among the 40 counties and regions surveyed on a variety of metrics by StarCapital Research. But, an undervalued equity market has achieved better returns in the future compared to their overvalued foils. The following table shows how much the U.S. stock market is overvalued compared to other markets around the world:

Source: StarCapital Research

The U.S. stock market’s cyclically-adjusted price-to-earnings (CAPE) ratio, which compares decade-long stock prices with corporate earnings, is 28. This is the third highest among the countries compared, cheaper only to Denmark (36.1) and Ireland (34.5). Historically, the CAPE ratio at current levels in the U.S. has preceded significant market declines.

The price-to-earnings ratio in the U.S. comes in at 22.4, the tenth-highest in the world if we exclude the broader segment of developed Europe. Even though such a ratio is below the U.K.’s 31 and India’s 22.8, it is way above China’s 7.4 and Russia’s 7.1. Both these nations are considered to be the most inexpensive.

The U.S., in the meanwhile, has a price-to-book ratio 3.1, the second highest among the 40 regions, while on a price-to-sales ratio basis, the nation is the seventh most expensive country in the world, with a reading of 2.0.

Two-Third Investors Think U.S. Stocks Are Overvalued

Only 36% of investment managers find the U.S. stock market to be fairly valued at current levels or undervalued as per a quarterly investment manager survey performed by Northern Trust (NASDAQ:NTRS) Asset Management. Such a reading marks the lowest since the survey began in the third quarter of 2008. On the other hand, two-third of investors – 65% – believes that the U.S. market is overvalued. This is the highest percentage for overvaluation on record.

The survey, further, figured out that only 6% of investors considered consumer staples to be undervalued, while 15% said the same for technology. Financial, energy and health care sectors have a little more room to grow, with 39%, 32% and 32% respondents, respectively, believing that stocks are undervalued.

With the Dow Jones, the S&P 500 and the Nasdaq hitting a series of record highs this year, experts are in fact contemplating investments overseas. A whopping 86% of investment managers believe that the European stocks are undervalued, while 88% feel that the emerging market equities are undervalued or fairly priced.

But, what has driven the U.S. stock market to record levels and eventually resulting in pricey stocks? A big chunk of gains came from the so-called FAANG stocks that comprise tech companies like Facebook Inc (NASDAQ:FB) , Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL) , as well as consumer discretionary stocks like Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) . Significant improvement in corporate earnings is also cited to be the reason for the market’s recent gains.

“FAANGtastic five” – Gains Traction

If we consider the “FAANGtastic five” – each of them gained between 25% and 52% in the year-to-date period. Amazon, in particular, at one point topped the $1000-a-share level, highlighting the stellar show put up by tech stocks in the said period. Internet and tech companies scaled higher on hopes that potential tax reforms will get eventually implemented.

Many tech companies have, in fact, boosted earnings without the help of government policies. Notably, Apple is riding high on growing demand for smartphones and web-based services.

However, as chances of Trump getting his policies through Congress ebbed, gains have continued on the back of solid corporate earnings.

Q2 Earnings Upbeat

Improved second-quarter economic growth, strong manufacturing and service surveys, and a moderate uptick in wage growth helped Corporate America post relatively high profit margins in Q2. We now have results from 97 S&P 500 members. Total earnings for these companies are up 8.4% from the same period last year on 5.1% higher revenues, with 78.4% beating EPS estimates and 72.2% beating revenue estimates.

According to estimates, total second-quarter earnings for the S&P 500 cohort are expected to be up 8.6% from same period last year on 4.7% higher revenues. This would follow earnings growth of 13.3% in Q1 on 7% revenue growth, the highest in at least two years (read more: Original post

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Written By: Zacks Investment Research