From Zacks: Who doesn’t like undervalued stocks or ETFs? In fact, investors hunt for stocks with a low P/E or undervalued- ones especially when the market is buoyant, as we are witnessing now.
Many market watchers are warning of a bust in the near term. This is where the search for value stocks or ETFs with typically low P/E ratios starts.
The lower the P/E of a security, the better for a value investor. This is because value investors believe that the security’s current market price is not reflective of its historical/future earnings and therefore chances of outperformance are higher.
Naturally, there are very few investors who pay attention to securities with an increasing or high P/E. But this often-overlooked trend can prove worthwhile in finding great stocks or ETFs. Let’s dig a little deeper.
Rising or High P/E: An Useful Tool Too
Investors should note that stock prices move in tandem with earnings performance. If earnings come in stronger, the price of a stock shoots up. Solid quarterly earnings and the forward guidance in turn boost earnings forecasts, leading to stronger demand for the stock and an uptrend in its price.
So, if share price is rising steadily, it means that investors are assured of the security’s fundamental strength and expect some more strong positives out of it. When these outperforming stocks or a sector makes a fund, that basket too boasts a high P/E but has further room to run.
ETFs to Tap at High P/E for Further Gains
Below we highlight a few ETFs with a high P/E (much higher than the S&P-based ETF SPY’s P/E of 18.67 times) that are still top ranked. All these ETFs beat SPY in the last six months (as of Oct 24, 2017).
The fund reflects the performance of companies involved in the social media industry.
Rank: #1 (Strong Buy)
The fund follows the Indxx India Consumer Index which is a maximum 30-stock free-float adjusted market capitalization-weighted indexdesigned to track the market performance of companies in the consumer industry in India (read: 4 India ETFs to Brighten Your Portfolio This Diwali).
Rank: #2 (Buy)
The fund follows the S&P Internet Select Industry Index, which represents the Internet segment of the S&P Total Market Index (read: 5 Overlooked Tech ETFs Crushing XLK).
The fund follows the Dynamic Large Cap Growth Intellidex Index. It invests at least 90% of its total assets in stocks forming the index which provides capital appreciation while maintaining consistent stylistically accurate exposure (read: Market Hits New Record High: Growth ETFs Top).
The fund’s underlying index Dow Jones U.S. Select Aerospace & Defense Index looks to track the performance of the aerospace and defense sector of the U.S. equity market.
The iShares Dow Jones US Aerospace & Defense ETF (ITA) was unchanged in premarket trading Tuesday. Year-to-date, ITA has gained 29.02%, versus a 15.92% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Zacks Research.