Scouring S&P 500 sectors for bargains

The energy sector looks to be the last pocket of value in a fairly priced U.S. equity market.

Ben Johnson, CFA 26 May, 2015 | 5:00PM
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As the S&P 500 continues to notch fresh all-time highs, investors' bullishness on U.S. stocks has ebbed. Stock market valuations look fair at best--and, in some corners, stretched. According to our equity analysts, the S&P 500 looks fairly valued at present, as indicated by our current price/fair value estimate for SPDR S&P 500 (SPY), which stands at 0.99.

However, looking one layer deeper reveals a potential opportunity in the U.S. energy sector. In the table below, I've looked at valuations across each of the nine sectors of the S&P 500, as represented by the Select Sector SPDRs that track the relevant sector benchmarks. Based on this snapshot -- which includes our analysts' fair value estimates and current and historical average yields, price/book value ratios and price/earnings ratios -- most sectors appear to be either fairly valued or modestly overvalued at present. However, the late-2014 downdraft in oil prices appears to have created a potential opportunity in the energy sector.

Below, my colleague John Gabriel shines a spotlight on the largest and most-liquid U.S.-traded ETF tracking the sector,  Energy Select Sector SPDR (XLE). As always when considering investing in U.S.-dollar instruments, please ensure that currency conversion costs don't take too big a bite out of your returns when measured in Canadian dollars.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Chevron Corp112.80 USD0.95Rating
Exxon Mobil Corp63.12 USD0.69Rating

About Author

Ben Johnson, CFA

Ben Johnson, CFA  Ben Johnson, CFA, is director of global ETF research for Morningstar and editor of Morningstar ETFInvestor, a monthly newsletter.

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