A string of woes hurt the U.S. market momentum in the first quarter of 2016 with the S&P 500 barely adding gains thanks to global growth issues and persistent worries in the oil patch. Many, including the Republican favorite for president, Donald Trump, believe that the U.S. economy may bump into a recession due to an overvalued stock market, high unemployment and “an economic bubble.”
While we are not sure if the economy will encounter a recession, the earnings recession has already taken for a grip over the U.S. economy. Earnings estimates have been downhill constantly over the last few of years and this downing trend is very much present in Q1 too.
The earnings of the S&P 500 index is likely to decline 10% in the first quarter while revenues are expected to fall 1.4% as per the Zacks Earnings Trends issued on March 29, 2016. The earnings and revenue expectations are projected to fall 4.5% and 1% respectively in the second quarter. However, things will take a positive turn from the third quarter.
In such an earnings scenario, overvaluation issues can be brutal. And some market experts’ fears of inflated stocks also seem true. The S&P 500 is down just 3.2% (on April 4, 2016) from its 52-week high. Given this, investors are likely to be motivated to search for a value sector. Investors keenly seeking undervalued sectors would be glad to know that there are still a few hidden treasures in this otherwise-overstated market.
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 are favoring auto sales.
Despite strong fundamentals, the sector has a P/E ratio of 8.5 times for 2016 and 8.1 times for 2017, the lowest in the S&P universe, as per the Zacks Earnings Trend issued on March 29. Investors should note that the P/E of the auto industry trades at a 51.1% discount to the current-year P/E of S&P and at a 47.4% discount to the next-year P/E. The auto sector is expected to post 21.1% earnings growth in Q1 on 1.9% revenue growth.
Investors should note that there is only one pure play CARZ in the space that provides global exposure to nearly 40 auto stocks. CARZ has a Zacks ETF Rank #3 (Hold) and is down 13.6% so far this year (as of April 5, 2015), implying that the auto stocks are yet to capitalize on the sector’s momentum.
Transportation – SPDR S&P Transportation ETF (XTN)
This is a risky play as the transportation ETF XTH has a Zacks ETF Rank #4 (Sell). However, with oil prices southward and touching the $35 level, transportation ETFs like XTN should get a boost.
