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

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 Corp71.95 USD-4.74
Exxon Mobil Corp34.39 USD-3.21

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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