Digging for Value in an Overvalued Market

With the market hitting new highs almost everyday, are there any sector with value left to invest our money? That is a good question from the view that many analyst and investors are of the opinion the markets are fully valued. Some believe the markets are precariously overvalued. That said, where should we look to put money to work?

Energy remains an attractive opportunity despite the recent surge higher. Taking a peek at the chart of XLE you find that the recent move above $80 goes back to the high of July 2011. The price of crude near $96 would lead you to believe that the upside is limited for the broader sector. The key is to break the sector down and look at the parts. IEZ, iShares Oil & Gas Equipment and Services ETF has moved sideways in a broad range since the summer of 2011. A move above the $60 level is the next hurdle for the sub-sector looking forward. This component of energy has lagged and thus has plenty of upside to make up if the broader energy sector is to take a leadership role going forward. XOP, SPDR Oil & Gas Exploration and Production ETF looks very similar. A long and wide trading range that has moved basically sideways since the summer of 2011. A move above the $62 level is a key move for the ETF. The sector is trading at a 14.1 P/E ratio which less is than the S&P 500 against forward earnings. Thus, there is value in the sector on a forward looking basis. If you don’t have positions in the sector, take time to do some homework and find the opportunities that work for your portfolio.

Technology is another sector that has been playing catch up over the last couple of weeks. It currently ranks ninth among the ten sectors of the S&P 500 index in year-to-date performance. XLK, SPDR Technology ETF has lagged all year and most of last year. The surge off the April 18th low has made up for some of the slow growth, but when you break down the parts there is still opportunity. IYW, iShares Technology ETF has a target of $78.55 on the upside and a stop at $74 with the close on Tuesday at $75.11 gives a nice 3 to 1 risk/reward outlook. The P/E ratio is 14.1 currently giving plenty upside for a growth sector. Semiconductors (SOXX) have been the leading component on the recent surge and cleared the $60.23 resistance last Friday. All things considered the semi’s still show an upside opportunity looking forward. Internet (FDN) was one of the key leaders until stalling in January. The sideways movement has broken above resistance at the $44.10 level and looks promising from there. Software (IGV) was leading the sector last fall, but stalled in March on some earnings disappointment and tested lower. The last four weeks some momentum has returned to the sector and the move above $69 was a good first step in reclaiming the upside momentum. A break above $70.50 (March high) would be the next hurdle. Networking (IGN) has been the biggest disappointment in the sector. Since hitting a high in February the sub-sector has has dropped more than 10% until the recent move off the lows. Still in a downtrend and sluggish it could offer plenty of upside as the issues are resolved in the computer sector. Overall technology still offers positive upside opportunity if the broad market continues to climb.

Financials have been orphaned by many investors as the distaste for the financial crisis keeps the sector trading at a  discount. XLF, SPDR Financials ETF has climbed 16.8% since the first of the year with about 40% of that coming in the last four weeks. Why the sudden interest in the sector? Banks (KBE) have been leading the parade, but it has been the regional banks (KRE) of late that have taken on the leadership role. The first half of the year the large banks led the way on improving balance sheets and earnings. The first quarter earnings data has favored the regional banks and thus the leadership shift. The insurances (KIE) sector has done well, but still has room for growth looking forward. XLF has a current P/E of 12.8 which leaves plenty of room on the upside from my view. There are still the challenges of lawsuits, mortgage foreclosures and perception to overcome, but this is a sector that offers a value based upside going forward.

It take time and homework to find the opportunities in the market versus just following the herd. Digging in and doing your homework provides you the confidence you need to follow through with the investments you find.