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Value Investing - How to find Undervalued Sectors

|Includes: BBH, EWI, IAI, OIH, Guggenheim Solar ETF (TAN)

Value investing is a style of investing where one invests in stocks or sectors that are undervalued. I like value investing because undervalued sectors are generally less risky investments. So how do you identify undervalued sectors? I describe below a very simple way to find undervalued sectors.

With the advent of ETFs, there are now a wide variety of free sites online where ETF performance is easily available. My favorite is the site "ETFscreen.com". Click on the "Performance" link at the top of the page. This page provides performance information for the last year for 700+ ETFs. The default filter on the page removes leveraged ETFs and also ETFs that do not have at least 1 million shares traded over the last 21 days. This filter is good for most investors, you can leave it as it is. Cut and paste the entire table that shows up (typically around 400 ETFs) into an Excel sheet. Add a column in your Excel sheet that sums the performance of the last 3 months, 6 months and 1 year. Sort this additional column in ascending order. The ETFs that have the worst performance over all three periods added together are the most undervalued sectors.

Your friends are most likely investing in the ones that have the best performance, but they are taking tremendous risk in putting their money in overvalued sectors. Investing in undervalued sectors might be unfashionable, but is the least risky.

However, before you put your hard earned money in the most undervalued sectors, you need to find the ones that are likely to appreciate in the near future. Some sectors are likely to remain undervalued for a long time and you need to avoid those sectors to make a decent return on your investment.

In my next post, I will describe how to find the undervalued sectors that are likely to move in the short term.


Disclosure: No positions