MW Here's where to find top investment newsletters' favorite undervalued stocks

By Mark Hulbert

The consumer sector doesn't deserve to be so deeply out of favor

Despite being more out of favor than at almost any point since 2005, consumer stocks are among the most highly recommended by the top-performing newsletters I monitor.

It's understandable why consumer stocks would be out of favor in today's economic environment, given the likely impact of the looming global trade war on consumer goods, many of which the U.S. imports. What may be more surprising is why so many of such stocks are being recommended for purchase by the top-performing newsletters.

The reason is that these newsletters largely pursue contrarian strategies. Their editors don't necessarily disagree that a trade war could disproportionately impact consumer-goods companies. They nevertheless believe that the market almost always overreacts, and that in turn makes it likely that consumer stocks don't deserve to be as out of favor as they currently are.

To discover which sector is the most undervalued, I calculated the ratio of each sector's price-to-earnings ratio to that of the S&P 500 SPX. A ratio below 1, for example, meant that the market was deeming it to be more undervalued than the overall market. I then compared each sector's relative P/E ratio to comparable ratios for each quarter's end since 2005. For the consumer-discretionary sector XX:SP500.25, its current relative P/E ratio is lower than 89% of its past quarters' ratios, indicating that it's relatively cheap. (I got the idea for using this method to calculate sectors' relative valuations from James Stack of InvesTech Research.)

Almost as undervalued as consumer discretionary is consumer staples XX:SP500.30; its current relative P/E ratio is lower than 85% of past quarters' ratios. It is the second-most recommended sector among the top-performing newsletters.

Favoring undervalued stocks is a good idea at any time. But it is especially so when many believe there is an above-average chance of an economic recession and a bear market on Wall Street. That's because valuations may provide a better safety net for these stocks than for those with sky-high P/E ratios.

A good illustration of this is the relative performance of high and low P/E stocks after the dot-com bubble burst in March 2000, as you can see from the chart above. It plots the performance of two groups of stocks: the 10% with the highest P/E ratios, and the decile containing those with the lowest ratios. From when that bubble burst to the market's bottom in the fall of 2002, the portfolio of highest P/E stocks lost 29.9% annualized- versus a 2.3% annualized gain for the lowest P/E decile.

The most overvalued sector currently is information technology - just as it was at the top of the internet bubble.

The most overvalued sector currently, as judged by relative P/E, is information technology XX:SP500.45 - just as it was at the top of the internet bubble a quarter-century ago. The ratio of the sector's P/E to that of the S&P 500 is 1.38, meaning that it's valued 38% more richly than the broader market. That 1.38 ratio is higher than 86% of comparable ratios over the past two decades.

Of the market's primary 10 sectors (other than real estate), there are five whose relative P/E ratios are lower than at least 60% of quarter-end readings since 2005. The table below lists the 19 stocks in these sectors that are currently recommended for purchase by at least two top-performing newsletters - 14 of the 19 are in the consumer sector, including Expedia (EXPE), General Mills $(GIS)$, General Motors $(GM)$, Lowe's $(LOW)$, Nike $(NKE)$ and Target $(TGT)$. No stocks appear in the table for the utilities sector XX:SP500.55, since there is no stock in that sector currently recommended by at least two top-performing newsletters.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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-Mark Hulbert

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April 15, 2025 17:43 ET (21:43 GMT)

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