The most undervalued stock sector today was undervalued before stocks started falling in the last week. When the correction subsides, these stocks are the first place you should turn. I’ll tell you which sector in a bit. First, let’s talk about what’s happening with the market.
This week, United Airlines (UAL) announced the withdrawal of the 2020 revenue and profit guidance that they’d issued in January, due to the impact of the coronavirus, a.k.a. COVID-19, on airline travel. The company suspended flights to Hong Kong and three destinations in China, and also to about 75% of their other trans-Pacific routes, currently scheduled to be resumed on April 24. Additionally, MasterCard (MA) lowered their first-quarter revenue guidance due to the virus’s impact on global commerce.
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Generally speaking, stocks fall when companies announce bad news. When a company states that their revenue and profits are going to be lower than expected, that counts as bad news, and investors can expect the share price to fall!
I mention these economic situations because I interact with people on a daily basis who think that the stock market is falling because people are sick, and that the stock market will rebound rapidly because this illness will quickly run its course. Let me assure you, the stock market impact of COVID-19 is not about the illness and potential deaths. This virus’s impact on the population is not even as serious as a typical flu season – it’s simply become the “media topic du jour,” so you’re hearing about it constantly. Remember, it’s the media’s job to scare you so that you keep coming back for news updates, and what could be more scary than telling the public about a potential deadly health epidemic?
No, people getting sick from a virus is not the problem with the stock market. The stock market was overdue for a price correction. U.S. stock markets had risen about 12% since October. That’s a very big move for a market index in a short period of time, and as such, the market was overdue for a price correction, regardless of the existence of COVID-19. (I’ve been warning subscribers to my Cabot Undervalued Stocks Advisor about how to prepare for this market correction since December.) COVID-19 is simply the trigger that sparked the correction, and the cause of the crippled global economic activity that will sustain the correction.
Typically, there will be days, early on during a price correction, in which the market rises and investors are enthused. Those days are then followed by more bearish days. The market pullback might only last for a few weeks, followed by a period of sideways trading as the market gets its bearings.
When the correction does finally run its course—whenever that happens—here’s what you should be buying.
Buy this Undervalued Stock Sector When the Market Settles Down
There are many strategies investors can employ when buying stocks for capital gains. One that’s at the top of my list right now is my plan to buy growth stocks within the most undervalued stock sector.
I maintain a Buy List of companies that are producing strong earnings growth that currently have low valuations, as measured by their price/earnings ratios (P/Es). The list contains stocks from a wide variety of sectors, with the highest representation in the financial sector, most specifically among investment management, life insurance and annuity companies.
If you’re familiar with fundamental analysis, you know that a P/E that’s down in the single digits could represent quite a bargain, as long as a company’s revenue and profits are also attractive. The 2020 P/Es at Ameriprise Financial (AMP), Athene (ATH) and Brighthouse Financial (BHF) are 8.5, 6.2 and 4.1, respectively, as of the market’s close on February 26. And those are just the first three excellent financial stocks as I go down my list alphabetically. There are more!
The market hasn’t finished falling yet. All of these stocks are going to need to settle down into a trading range before they’re ready to rebound, so there’s no hurry to buy stocks. You can wait a few weeks, and you’re not going to miss the boat.
In the coming weeks, I’ll be advising investors on which stocks represent excellent values, and which have price charts that are turning bullish. Join me at Cabot Undervalued Stocks Advisor as we capitalize on outsized profit opportunities that naturally come with any post-correction stock market rebound.