Only Some of the Market is Overvalued

Only Some of the Market is Overvalued

There is much speculation about which direction the market will take in the next few weeks. Many analysts are stating that the markets valuation is now stretched and will not move any higher until either earnings rise significantly.

However, it would appear that while some stocks in the market are indeed trading on stretched valuations, some sectors are still undervalued.

Indeed, Bank of America and other market analysts recently put together a study of equity ratios dating back 27 years to 1986. Within the study they found that compared to its 27-yr average, the S&P 500 is undervalued by 17% on a price-to-book ratio and 6% on a forward price-to-earnings ratio.

However, the study did reveal that the consumer discretionary sector is overvalued by 40%, compared to its 27-yr average historic price-to-book ratio, 27% compared to its price-to-operating-cash-flow ratio and overvalued by 10% compared to its forward price-to-earnings ratio.

On the other hand, it would appear that one of the most undervalued sectors in the S&P 500 right now is the health care sector, surprising, considering how defensive the sector is. Compared to its 27-yr historical averages, the sector is 36% undervalued on a price-to-book basis, 28% on a price-to -free-cash-flow basis and 8% undervalued on a forward price-to-earnings basis.


So it would appear that some of this market is still undervalued, you just need to do your homework.

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