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With the market overvalued, some investors are feeling uneasy, while others are simply having a hard time finding stocks worth buying.
Luckily, Morningstar has done the heavy lifting for us. They’ve outlined which parts of the market are overvalued and which might still be worth buying.
The investment site notes that large-cap stocks are cheaper than mid- and small-caps. In fact, they call large-caps undervalued.
And when it comes to sectors, there’s slim pickings.
According to Morningstar, financial service stocks are the only sector in the market that’s undervalued. Many of the sectors actually look overvalued, but the basic materials and energy sectors are at least considered fairly valued.
In order to find stocks that could still be worth buying, I focused on large-cap stocks and picked the best stocks from each of the three industries that aren’t overvalued.
Here are the three stocks to own in today’s overvalued market:
No. 1 Stock In Today’s Overvalued Market: Citigroup (NYSE: C)
Starting off with the only sector that’s undervalued, financials, Citi is easily one of the cheapest banks around.
It trades at a P/E ratio of 9.3 based on next year’s earnings estimates and a price-to-book (P/B) ratio of only 0.75. The industry leaders, Wells Fargo and JPMorgan Chase, each trade well above Citi. However, Citi is looking to close the gap. It’s been a painful year for the bank, underperforming the Financial Select Sector SPDR by nearly 15 percentage points.
But part of Citi’s focus going forward will be to further increase its presence in faster-growing global markets. Its global footprint is already one of the best in the industry, operating in over 160 countries.
The bank posted second-quarter earnings earlier this month that beat consensus estimates. But the big news was its settlement with the U.S. government for $7 billion, related to its selling of mortgage-backed securities just prior to the financial crisis. That’s still well below the $13 billion settlement JPMorgan had to pay.
Michael Levine of Oppenheimer noted that “the fact that the settlement addressed all the RMBS [residential mortgage-backed securities] issuance as well as CDOs [collateralized debt obligations] and was less than the $10 billion figure floated a few weeks ago is a positive. And it’s a positive that it’s behind the company now.”
No. 2 Stock In Today’s Overvalued Market: The Dow Chemical Company (NYSE: DOW)
Dow Chemical is the U.S.’s largest chemical company. It has a number of segments, which is part of the reason it trades at a discount to its peers. Activist Dan Loeb and his Third Point hedge fund are owners of the stock for just that reason, calling for the company to be more transparent and break up its businesses.
Dow Chemical’s 14 P/E puts it trading below its historical and industry average P/E ratios. Dow also offers a 2.8% dividend yield.
One of the big positives for the company is that it has impressive exposure to faster-growing markets outside the U.S. It generates over two-thirds of its revenues from outside North America.
Some of its areas of focus going forward will be food/nutrition, energy, water and health. All areas of the market that should see increases in demand due to a steadily rising global population.
No. 3 Stock In Today’s Overvalued Market: ConocoPhillips (NYSE: COP)
ConocoPhillips is one of the best-yielding oil and gas Supermajors. Its 3.4% towers over the likes of Exxon Mobil’s 2.7% yield. It’s also one of the cheapest stocks in the industry, trading at a P/E ratio of 13.2.
Unlike ExxonMobil and Chevron, ConocoPhillips is a pure play exploration and production company. It got out of the low-margin refining business in 2012 and now has a profit margin that’s nearly double ExxonMobil’s. However, it still trades relatively in line with the integrated oil and gas companies; unjustly perhaps.
It has a portfolio that encompasses assets in some of the fastest-growing oil and gas plays in the U.S. These include the Eagle Ford, Bakken and Permian shale plays. Its focus going forward will be on increasing production of oil throughout the U.S. Part of this includes its divestment strategy, where it sold off $10.2 billion worth of non-core assets in 2013.
We know how hard it is to find worthwhile investments regardless of the economic backdrop. It gets even harder when the entire market looks overvalued. These three stocks look to be some of the best investments in industries that aren’t quite overvalued.
If you’re looking for more great buys in an over-valued market, join Ian Wyatt’s Priority Access List to find out what he’s got cooking later this week.
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