The Most Undervalued Sector in the Stock Market Today
One word that you won't hear much right now on Wall Street is "value." So many companies and industries are regularly posting 52-week or all-time highs lately, and valuations across the board are looking pretty frothy.
This, of course, doesn't apply to every sector or company out there. As in every big stock market run-up, there are stragglers that value investors might be interested in, so we asked three of our contributors to highlight some that look undervalued to them today. Here's why they picked SPDR S&P Biotech ETF (NYSEMKT: XBI),Oaktree Capital(NYSE: OAK), and offshore rig companies like Transocean (NYSE: RIG).
Image source: Getty Images.
A smart way to buy into a high-growth industry
Brian Feroldi (SPDR S&P Biotech ETF):The S&P 500 might be touching all-time highs, but the biotechnology sector has largely been left in the dust. That's partially due to political promises to reform Obamacare and put an end to the soaring prices of prescription drugs. In turn, many investors have pulled money out of the sector, sending many biotech ETFs down more than 23% from their all-time highs.
While the political pressure isn't likely to dissipate anytime soon, I can't help but feel that the drop is providing investors with a great chance to get in. After all, thebiotechnology sector is growing rapidly and promises to have a huge impact on human health over time. Investing while it is still out of favor makes sense to me.
A smart way to put money to work in the sector is with the SPDR S&P Biotech ETF. This fund holds a position inabout 90 different biotech companies ranging from the tiny to the huge. I like that diversity since it strikes a nice balance between the high-risk clinical-stage biotechs and the cash-rich large caps.
One attribute that I like about this ETF is that it follows anequal-weight strategy that requires it to rebalance itself quarterly. This means that the fund regularly trims its recent winners and buys more shares of companies that have fallen. Thus, the fund prevents itself from becomingoverly concentrated in one or two stocks, which I think is a smart idea given how erratically clinical-stage biotechs can trade.
A glance at this ETF's long-term track record shows that this strategy is working like a charm. The SPDR S&P Biotech ETF has massively outperformed both the S&P 500 and the iShares Nasdaq Biotechnology ETF over the last one, three, five, and 10 years.
Despite providing investors with instant diversification in a dynamic sector and sporting a track record of success, this fund's expense ratio is only 0.35%. With the biotech sector currently out of favor, I think that right now is a great time for investors to consider jumping in.
Mispriced hedges
Jordan Wathen(Oaktree Capital): There are few bargains in the market today, and even fewer in the financial industry. That said, I think alternative asset managers may be one corner of the market that isn't getting the respect it deserves.In particular, I thinkOaktree Capitalis attractive because it trades at a single-digit multiple of normalized earnings and offers shareholders multiple ways to win.
The company frequently highlights a metric known as its "net accrued incentives," or fees it would receive if its successful funds were liquidated today. These accrued incentive fees recently rose to $6.12 per unit in the fourth quarter, which serves as a pipeline to maintain its dividend yield of about 5.5%.
If the markets continue to enjoy unusually low volatility and minimal defaults, Oaktree will liquidate old funds and turn its accruals into cash, paying out the proceeds to shareholders along the way. In the event the markets meet turbulence, Oaktree will finally find opportunities to deploy its dry powder, which recently stood at about $21 billion, of which $13 billion isn't earning a dime in fees.
Best of all, Oaktree serves as an excellent hedge. It's the rare financial that gets better as things get worse for its peers. And while shareholders shouldn't root for things to get worse, all of us can find comfort in seeing a little green when everything else is deep in the red.
Looking in deep waters for deep value
Tyler Crowe (offshore rigs):The oil and gas industry had a pretty good run in 2016 as it started to reemerge from the depths of the recent downturn. Oil and gas prices are on the rise, producers' profits are going up, and capital spending is pouring back into the business. One place where that capital spending has not been heading, though, is toward offshore and deepwater development. As a result, investors continue to shed shares of offshore rig stocks, and that is making this group of companies one of the most undervalued sectors out there today.
To get an idea of how pessimistic investors are on this sector, just take a look at the price-to-tangible book ratios for five of the largest offshore rig owners today. Basically, the market thinks that these companies are worth pennies on the dollar of their liquidation values:
Data source: S&P Global Market Intelligence.
The market is very bearish on these stocks because of shale drilling. Shale has become a less expensive source of oil and gas than offshore development, and the time it takes to start generating cash from a shale well is measured in days, instead of years for an offshore development. So many producers are electing to drill for shale today to get the faster injection of cash.
It's highly unlikely, however, that shale will be able to meet all of the growing demand for oil and replace declining production from older sources. So companies eventually will start to put more money into offshore development and lease out rigs from these offshore companies. When they do, their prospects will look much brighter. For those willing to wait for a payout, offshore rigs are in the most undervalued industry right now that could reap large rewards in the coming years.
10 stocks we like better than TransoceanWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Transocean wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 6, 2017
Brian Feroldi has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. Tyler Crowe owns shares of Seadrill. The Motley Fool owns shares of and recommends Atwood Oceanics. The Motley Fool recommends Oaktree Capital. The Motley Fool has a disclosure policy.