It’s always tempting to jump into the hottest stocks, and the hottest sectors, expecting that strength to continue. To that end, digital services names like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) look and feel like the best stocks to invest in right now. The former is up 118% year-to-date, while the latter is still up a market-beating 49%. Both are still going strong too.
If not those two specific stocks, a sector-based ETF like the iShares Dow Jones US Technology ETF (NYSEARCA:IYW) could be similarly savvy, risk-adjusted pick. It’s up 14%, as technology stocks have led the way this year in terms of sector-based performance.
Buying what’s hot isn’t always the smart-money move to make though. It takes some faith and guts to do it, but quite often the ‘best stocks to invest in right now’ are the ones that have been lackluster performers, yet sport compelling, superior fundamentals.
With that being the case, we’d all be wise to make a point of scooping up stocks from the financial sector.
Laggard ETFs Always Are Worth a Look
The graphic below isn’t a tough one to interpret. The iShares Dow Jones US Financial ETF (NYSEARCA:IYF) isn’t the worst-performing sector ETF among the ten the chart tracks; that (dis)honor belongs to the iShares Dow Jones US Telecom ETF (BATS:IYZ). But, the financial sector’s weakness has left it trailing the overall market.
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The reason for that weakness isn’t a tough one to figure out. Rising interest rates, with more on the way, have put the kibosh on rate-sensitive businesses. They’ve also been a concern because many of these names are dividend-oriented, and rising interest rates work against dividend payers.
The worry is understandable, but the assumption is wrong.
The reality is, there’s no empirical evidence that suggests, in the long run, financial stocks underperform when interest rates are on the rise. In some cases they can actually outperform, as higher interest rates also means lending is a more profitable venture. No two market scenarios are ever quite the same, and this go-around is no different.
As it stands right now though, there’s no particular reason to think trouble lies ahead for the sector. Indeed, these names arguably have more relative value than any other group right now, and are expected to keep that value through 2019, given their current prices.
Cheap Stocks With Some Value
Wise investors are always wary of reducing a buy/sell decision down to a mere number, since there’s always more to the story. On the flipside, numbers and data provide a logical methodology, whereas emotions like hope, fear, greed and FOMO can prod ill-advised decisions.
That’s why the table below, which lays out this year’s and next year’s projected PEG ratios for all the major S&P sectors is worth reviewing.
The PEG ratio (price-to-earnings ratio divided by earnings growth rate) is an effective means of comparing unlike assets.
Some sectors just aren’t capable of high growth, but that doesn’t make them not worth owning. Often these low-growth stocks cost much less, and usually they’re less risky. The use of a PEG ratio normalizes the data to make a meaningful, risk-adjusted comparison.
In other words, when paired with the raw performance data and the proverbial X-factors that can’t be quantified, one has to like the fact that on a valuation basis, financial stocks have more, and better, risk-adjusted returns to offer. They’re just plain cheaper too.
Best Stocks to Invest in Right Now
OK, so which financial names are the best stocks to invest in right now?
Investors looking for a simple solution may want to take on the aforementioned iShares Dow Jones US Financial ETF. More risk-tolerant investors, however, might want to consider Goldman Sachs Group Inc (NYSE:GS) or Bank of America Corp (NYSE:BAC).
Will Healy made the bullish case for Goldman last month, while beaten-down B of A has been one of my favorites for a while now. There are certainly other worthy names to choose from the sector though.
Nothing will stave off short-term weakness, mind you… not even for financial stocks. Emotions, the volatility associated with trade war chatter and an economy on the verge of overheating can all take temporary tolls on equities. It’s just the nature of the beast. You’ll still want to apply timing sensibilities, if you’re looking to step in.
If you can look beyond the fog of uncertainty though, the weakness from this sector isn’t merited, and likely won’t last. There’s just too much value, and growth on tap.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
