5 Of The Most Overlooked Investments Right Now

The S&P 500 has had a nice run over the last few years, and the big-name tech stocks that everyone knows — Apple, Microsoft and Nvidia, among others — have led the charge higher. But which stocks may have been unfairly overlooked in that fast-and-furious rally? Below are some timely suggestions, as well as some perennial spots for finding value stocks in a bull market.

5 sectors of the stock market that may be overlooked

Everyone knows the virtues of tech stocks. They offer highly scalable platforms that can throw off billions of dollars if they can grow, so the best tech stocks are rarely on sale. Instead, even the largest tech stocks are still somehow growing at the pace of growth stocks, despite being among the market’s trillion-dollar companies. But investors do have some value-priced picks.

1. Banks

Elevator pitch: With short-term interest rates poised to move lower, banks may be poised to outperform, especially since valuations are not stretched.

Banks often get overlooked because they’re not super-fast growers, and, well… they’re not tech stocks, which really do tend to overshadow everything. At the moment, these financials may be well positioned because the Fed seems poised to lower interest rates. In other words, the cost of the key ingredient for many banks is primed to decline, so their profit is likely to expand. Banks also benefit from the favorable regulatory climate under the Trump administration, which encourages consolidation, and consolidation has been a supertrend for 40 years in the U.S.

Rather than try to pick individual stocks, you can buy one of the best financials ETFs or go with a bank ETF, such as SPDR S&P Regional Banking ETF (KRE), which includes more than 100 stocks and should perform well as rates slide.

2. Thrift conversions

Elevator pitch: In the world of these tiny banks, the name of the game is being acquired, and these diminutive banks trade at substantial discounts, making them low risk.

The market has a ton of tiny banks called thrifts or mutual conversions, which have undertaken an IPO to become publicly traded. These banks trade cheaply, they often tend to repurchase their own stock at a discount, and they’re often acquired at a premium. Thrifts are relatively low risk, and their low valuation means investors are often paying less than the net value of the stock (the price after you subtract all the liabilities from the assets). Even better, executives often recognize this misvaluation and use some of the thrift’s cash — they have a ton of it due to the recent IPO — to buy back the stock and improve the return on the remaining shares.

After three years of being public, a thrift can be acquired and that often happens, usually at a significant premium to the bank’s net assets. While thrifts are not especially attractive banks — they’re competitively disadvantaged — they can make attractive acquisitions candidates for regional banks that want to grow. The U.S. bank landscape has been consolidating for years, but there are still thousands of financial institutions out there that are likely to be taken over.

(For a full rundown on mutual conversions and how they work, see my book “The Zen of Thrift Conversions.” Those looking for a mutual bank in their state should consult the companion website The Zen of Thrift Conversions, which also details the status of thrift IPOs.)

3. Spin-offs

Elevator pitch: Spin-offs are one of the best places to consistently look for mispriced stocks, and it’s possible to find some hidden gems being spun to the market with little fanfare.

Spin-offs have been a great hunting ground for savvy investors for years. A spin-off is like an IPO but without selling the stock. The company simply gives shares in one of its businesses to investors, so they end up owning shares directly in both. The spun-off company may offer a variety of attractive qualities — fast-growing, profitable, value-priced — and it may be hidden from most investors for months, until its filings begin to appear. Meanwhile, investors often receive a relatively few number of shares and decide to simply sell the spin-off rather than investigate.

One of the other big advantages of spin-offs is that they’re not hyped to the moon the way that IPOs are. While the Wall Street money machine pumps up this year’s hot IPOs, spin-offs may fly under the radar at a lower valuation, sometimes in part because insiders want to acquire shares. Following the insiders and understanding why they’re buying from and selling to the public may give you a good indication of where there’s value in the stock market.

You can see more about spin-offs in this list of the best investment books of all time.

4. Stocks hitting 52-week lows

Elevator pitch: This year’s dog is next year’s darling. Stocks that bounce around on the 52-week-lows list don’t get any love, but they often spring back to life when the year changes.

One great place to begin your search for outperforming stocks is to look at a list of the biggest losers: stocks hitting the list of 52-week lows. These stocks are sitting at their lowest level in 52 weeks, and while this dubious distinction doesn’t mean that they’re primed to go up, it does mean that a lot of the speculative excess has been knocked out of their price. These stocks often have a kind of “stain” on them after they become losers, which keeps other investors from buying them for a while, ensuring that these stocks fall well below their actual long-term value.

Of course, the market always has plenty of junk stocks, so it can be valuable to search for 52-week lows among the market’s larger stocks, say, in the S&P 500 index. By sticking to larger stocks, you’ll have companies with more financial resources that may simply have fallen out of favor. A word of warning: Don’t be too eager to dash for stocks hitting lows, since they often still have more room to fall before they settle out. You often have plenty of time to get back in.

In fact, Warren Buffett’s Berkshire Hathaway recently made a purchase of UnitedHealthcare, which was featured on our list of the worst-performing S&P 500 stocks after falling 50 percent.

5. Out-of-favor sectors: Oil and gas, health care and cloud computing

Elevator pitch: It’s the “best house in a bad neighborhood” strategy, but one where the neighborhood may become good again — find the best performers in an out-of-favor industry.

The stock market goes through regular cycles, and some stocks become cheaper just because their sector is not favored right now, though it may bounce back in the future. So by looking for an out-of-favor sector, you can find the “best of breed” company that will fare well when the sector returns again to investors’ good graces. However, sectors may go out of fashion and stay that way for quite a while, so it’s important to understand the dynamics moving the sector. Stocks are sometimes cheap for a good reason, and that reason may cause “permanent impairment.”

As of August, some of the worst-performing sectors are oil equipment and services, health care and cloud computing. This underperformance doesn’t make any of these sectors’ stocks a buy, but it does suggest that these areas may be ripe for exploration to see who might be worth buying if and when their stock is hammered. If you want to downshift to buying the sector (instead of the best player in it), you can try funds such as best energy ETFs or best health care ETFs, though each has various sub-sectors, so you need to know what you’re buying.

Bottom line

Overlooked securities can offer the potential for outsize profits as other investors eventually find a hidden gem and bid it up. With these approaches, you can find stocks apt to outperform, even if they don’t all do so, but you’ll need to do the research if you’re buying individual stocks.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.