Is there any Value Left in US Equities?

The high-flying US equity market has resulted in our US-based stock analysts currently viewing US equity as overvalued. So where do the opportunities lie?

Oliver Kettlewell 8 October, 2014 | 1:22PM
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US equity has outperformed its main regional rivals—the UK, Europe and Japan—since the financial crisis. The high-flying market has resulted in our US-based stock analysts currently viewing US equity as overvalued and we therefore see most value in defensive-orientated opportunities.

For example, large caps appear better value than small caps given that a number of less-mature companies are exhibiting elevated profit margins, more exposed to earnings downgrades than sturdy US blue-chips.

In terms of sectors, energy and materials are the cheapest industry groupings and both are trading around 0.95 times our fair value estimate. Stock-wise, rich valuations mean few stocks hold four- or five-star ratings, though online retailer eBay and Warren Buffet’s Berkshire Hathaway are two household names bucking this trend.

Finally, unhedged US equity exposure could outperform sterling-hedged returns if the Fed’s rate rises coincide with UK election uncertainty in the coming months.

A Bronze Rated US Equity Fund to Consider

Franklin US Opportunities Fund represents a strong choice for investors willing to accept the potential for volatility that comes with a high-growth strategy. 
We think highly of fund manager Grant Bowers. Based with Franklin his whole career, he started with the firm’s fixed-income group in 1993 before becoming an equity analyst with a focus on growth industries such as media. Bowers’ lengthy tenure should help him thoroughly understand the strengths and weaknesses of the more than 30 equity analysts at his disposal.

The process is typical for a growth strategy, with the manager seeking firms with sustainable earnings, a quality balance sheet and a decent valuation. However, certain facets of its execution stand out. For example, the growth mandate allows Bowers a degree of flexibility with share price valuations being allowed to run, as evidenced by the fund’s lofty price/earnings ratio, which is higher than that of the peer group and Russell 3000 Growth index. The growth tilt is also prominent in terms of sectors, with underweight positions in low-growth sectors such as consumer staples and utilities, while maintaining a number of positions in high-growth areas such as biotech.

A portion of this commetary originally appeared in Investment Week

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Franklin US Opportunities A Acc  

About Author

Oliver Kettlewell

Oliver Kettlewell  is a fund analyst with Morningstar OBSR.