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Value Stocks in an Overvalued Market?

Pandemic? What pandemic? Looking at the stock market, you wouldn’t think Wall Street was even vaguely aware of the global novel coronavirus pandemic that continues to rage around the world.

The word value amplified by a magnifying glass

Source: Shutterstock

To see just how bullish traders have been, all you have to do is look at the performance of the S&P 500 during the past month. During that time, the index has closed at a new all-time high — an astounding seven times.

How is it doing this, you ask? Traders are buying value stocks.

Now, we know it sounds a little silly to be calling any stock in this market a “value stock.” After all, the S&P 500 currently has a price-to-earnings (P/E) ratio of 37.47x, which is higher than it was during the dot-com bubble of the late 1990s (see Fig. 1).

A chart showing the S&P 500 P/E ratio from the late 1800s to 2020.

Source: S&P 500 PE Ratio – Chart — Source: multpl.com

However, when you dig down into the various sectors within the S&P 500 and compare their respective performance during 2020, you will find there are some sectors that have woefully underperformed. This is where you will find value stocks in an arguably overvalued market.

Traders have been doing exactly that for the past month-and-a-half. They have been identifying value stocks in underperforming sectors and buying them.

You can see just how bullish traders have been on these value stocks by looking at a comparison chart of the ten S&P 500 sectors, and the S&P 500 itself, tracked by State Street Global Advisors through their Select Sector SPDR funds and find out.

Here’s the breakdown of the performance of each fund in the sector-comparison chart in Fig. 2 since Oct. 28 — the last dramatic selloff day Wall Street experienced:

  • Energy Select Sector SPDR Fund (NYSEARCA:XLE): 45.33%
  • Financial Select Sector SPDR Fund (NYSEARCA:XLF): 21.86%
  • Industrial Select Sector SPDR Fund (NYSEARCA:XLI): 19.15%
  • Materials Select Sector SPDR Fund (NYSEARCA:XLB): 15.77%
  • Technology Select Sector SPDR Fund (NYSEARCA:XLK): 13.72%
  • SPDR S&P 500 Fund (NYSEARCA:SPY): 13.32%
  • Health Care Select Sector SPDR Fund (NYSEARCA:XLV): 9.92%
  • Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP): 8.38%
  • Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY): 8.33%
  • Real Estate Select Sector SPDR Fund (NYSEARCA:XLRE): 8.27%
  • Utilities Select Sector SPDR Fund (NYSEARCA:XLU): -0.37%
A chart comparing the growth of various SPDR sector ETFs from late October to early December 2020.

Source: Chart by InvestorPlace — Chart Source: TradingView

As you can see, energy stocks have outperformed the rest of the market by a country mile. Traders are betting that demand for oil is going to increase as the newly approved coronavirus vaccines get distributed and the global economy starts to pick back up.

The financial, industrial and materials sectors haven’t been able to keep up with the energy sector, but they’re still doing phenomenally well.

These same four sectors that are currently doing so well were some of the worst-performing sectors when stocks collapsed into a bear market in early 2020. You can see just how poorly they performed in the sector comparison we highlighted in our April 1, 2020 weekly update, Predictability Amid the Uncertainty on Wall Street.

Energy stocks had dropped by 48.97%, financial stocks by 36.18%, industrial stocks by 32.63% and materials stocks by 28.19% by the beginning of April. That drop created quite a hole that these sectors have been trying to dig out of. It also created a lot of new value stocks that traders have recently started buying.

The Bottom Line on Value Stocks

We expect this trend of buying value stocks to continue. We also expect Wall Street to continue buying the stocks that have led the market higher throughout the year. These stocks just aren’t as likely to see as dramatic an increase in price as the value stocks will.

On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article. 

John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it. John & Wade do not own the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/value-stocks-in-an-overvalued-market/.

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