10/28/2019
By Charles Payne, CEO & Principal Analyst

As the market edges closer to new all-time highs, it has become increasingly clear investors want a more balanced approach, which includes higher flying momentum names in the mix, but not carrying the entire load. I think this is the ideal approach for investors all the time, but it took riding the coattails of six names to turn against the crowd before a general awakening.

Finding Value

Although a low forward price-to-earnings (f P/E) ratio doesn’t always mean “value,” it is a great place to start. Last week, sectors with forward price-to-earnings ratios, which were lower than the S&P average, enjoyed outsized gains. Within those sectors, there are more nuanced levels of value.

Energy +4.37%

Valuations

• Drillers changing hands at 36.2 X
• Refining changing hands at 10.0 X

Summation: it’s been a terrible run for the sector as equipment maker shares are down on average -7.8% in 2019, -34% over the past year and -63% over the last five years.

It’s hard to be bullish on the group, partly due to the greater supply, inconsistent global demand, and political overtures and pressures (Senator and President candidate Elizabeth Warren would end fracking on the first day of office).

Industrials +2.16%

Valuations

• Aerospace & Defense: 16.8 X

Note: The industry is up 25.9% year to date (YTD), but only 11% in the last 52 weeks, but a whopping 103% five years

• Construction & Machinery 11.5 X

Note: The industry +38.1% year to date (YTD), but only 15% in the last 52-weeks, and only 11% in the last five -years

Summation: I see enormous potential in aerospace and more in construction stocks over next year. This is a sector investors should consider being overweighed. Obviously, Boeing (BA) is a key name while L3 Harris (LHX) is clicking on all cylinders.

Financials +1.89%

Valuations

• Life Insurance 8.2 X
• Insurance Brokers 18.9 X

Note: Overall, insurance has rallied 20.3% year to date (YTD), but only 18% in the past year, but 47% over the last five-years

• Investment Banks 9.9 X

Note: Banks are higher 25.6% year to date (YTD), but only +15% over the past year, although +85% in the last five-years

Summation: It’s been frustrating owning banks over the past year, but other financials have done well, including discount brokers and asset managers.  Investors should have exposure but not overweight.

Materials +1.30%

Valuations

• Industrial Gases: 24.3 X
• Diversified Gases: 8.7 X

Summation: This sector has seen a major bifurcation in performance among the industries and individual stocks. Overall, Materials are +15.4% year to date (YTD), 15.7% over the last 52-weeks and +20.2 over the last five years.

• Construction Materials: +52% year to date (YTD), +62% in the last year and +129 in the last five years
• Containers: +23% year to date (YTD), +25% in the last year and +34% over the last five years
• Metals: +10% (YTD), +10% in the last year and -24% over the last five years

I’m not interested in bottom-fishing in metals that have struggled for five years. Conversely, there are several names in construction on my watch list, including Vulcan Materials (VMC) and Masco (MAS). In containers, I like the action in Package Corp of America (PKG) and I’m spying Avery Dennison (AVY).

Information Technology +2.48%

Valuations

• Software: 33.6 X
• Semiconductors: 16.3 X
• Semi Equipment: 15.6 X
• IT Services: 13.9 X
• Hardware: 16.9 X

Summation: Big Tech Big Rep

Technology also enjoyed a strong week with a 2.48% gain. The read here, however, is the 19.8 forward price-to-earnings (f P/E) ratio is low for information technology, which once changed hands 48 times in 2001.

When people think Big Tech, they think of a dozen names that may be fewer, but the index is comprised of 68 names divided into six industries. While semiconductors powered the sector last week, investors may find the most value in software, despite the huge move in 2019.

Software is 48% of the sector, driven by companies deeply involved in the cloud and enterprise solutions. I’m watching Workday (WDAY) and ServiceNow (NOW), as very much oversold. The problem is volatility (high Beta), so I have been focused on them as trading ideas.

For example, WDAY has room to $181 before facing a critical long-term upside hurdle, but that would be a magnificent trade from where shares closed last Friday.

In semiconductors; waiting for Advance Micro (AMD) to break out through $34.00 and Micron (MU) through $51.00.

Seeking Value Conclusion

Overall, investors should be leery of sectors and names where share prices are lower than five years ago. There could be trading opportunities. However, for investors, they must be sure the fundamentals have turned around. 

On that note, we like to buy low when it makes sense. Right now, there are a lot of stocks that appear oversold and poised for strong rebounds.

Meanwhile, certain sectors and industries have seen great price appreciation, but they are still viable investments. Remember: we chase fundamentals, not stocks.

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Charles Payne
Wall Street Strategies

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