One of the benefits of a market downturn is that stocks and exchange traded funds (ETFs) become cheap. As we get deeper into the rally, value investments are becoming harder to come by, but not impossible to find. Value investors will have to look beyond the obvious and sift through the dross to find the gem.
There are three places you can look to find those diamonds in the rough.
The first place to start looking is at those investment that didn’t fully participate in last year’s rally, remarks Carla Fried for CNNMoney. Or, look for stocks that have increased with the broad market but whose fundamentals have improved beyond the average. Lastly, an investor may shift portfolio strategies into a defensive, income-generating one. [New Year, New ETF Strategy.]
Undervalued laggards. The health care sector was one left behind in the rally over fears about the impact of health-care reform. While the loss of the Democratic majority in the Senate has abated those fears, legislation may be getting closer to reality. Drug companies are trading at a slight premium to the S&P – investors are paying less per dollar of health-care earnings than for other corporate profits. [Health Care ETFs for an Uncertain Outcome.]
- Health Care Select Sector SPDR (NYSEArca: XLV)
Cheap performers. Information technology companies were winners in the rebound, but tech has seen its price/earnings ratio fall since the financial crisis. Forrester Research projects that global spending on IT products and services will increase 8.1% this year to $1.6 trillion. Additionally, tech companies are also sitting on large wads of cash for future investments. [Tech ETFs: A Way to Avoid the Guesswork.]
- Vanguard Information Technology (NYSEArca: VGT)
Dividends. Dividend-paying stocks are hovering at an average P/E of just 15. Some stocks are yielding 2%, but large telecommunications companies are yielding more than 5%. You can still find yield on bond ETFs, but careful: bond prices will decline as interest rates increase, putting your principal at risk. [More on Dividend ETFs.]
- iShares S&P Global Telecommunications (NYSEArca: IXP)
Before jumping into anything, though, be sure to have an investment strategy in place. We use the 200-day moving average strategy to determine when we’re in and when we’re out. When a position is above its 200-day, it’s a buy signal. When it drops below or 8% off the recent high, it’s a sell signal. [How to Follow the Trends.]
For more information on trend following, visit our trend following category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.