A string of woes have held back the U.S. market this year, with the S&P 500 adding just about 2.5% so far. Global growth issues, Fed lift-off worries and a surging greenback are coming in the way of the markets’ outperformance. While many may hope for a sharp revival in the market in 2016 following such a slow year, Goldman Sachs’ latest prediction points to the same story next year.

Considering dividends, Goldman estimates stocks to return merely 3% next year. The renowned investment banker also raised overvaluation concerns over the U.S. market. This statement very well motivates investors to search for a value sector, if there is any left at all. A value play is especially required given the broad-based revenue weakness noticed in Q3, not only among multinationals but also within small-cap companies.  

After all, the low valuation might lead investors to some quality sector buys at best prices. No doubt, with all the major indices trading at around all-time highs, it is hard to find value plays at home. But for those investors ardently seeking undervalued sectors, there are still a few hidden treasures out there.

While several indicators are used to find out any stock or sector’s valuation status, price-to-earnings ratio or P/E has been the most widespread. We have identified four sector picks having the lowest forward P/E ratio for next year’s earnings in the pack of 16 S&P sectors classified by Zacks and detail the related ETFs to play those sectors’ undervalued status.

Auto – First Trust NASDAQ Global Auto ETF (CARZ)

The U.S. automotive industry is on high gear. A strong labor market, persistently lower energy prices, increasing aging vehicles on road and a still-low interest rate environment made the first half of 2015 the best six months in a decade for auto sales. Though the Fed is poised to raise key interest rates in December, it will opt for a slower rate hike trajectory. So, auto loans are presently feared to get pricy.

Despite strong fundamentals, the sector has a P/E ratio of 9.9 times for 2015 and 8.8 times for 2016, the lowest in the S&P universe, as per the Zacks Earnings Trend issued on November 18 (read: Impressive Auto Earnings Put This Car ETF in Focus).

Investors should note that the P/E of the auto industry trades at a 43.8% discount to the current year P/E of S&P and 45.7% discount to the next year P/E. The space is down 12.1% so far this year, implying that the auto stocks are yet to capitalize on the sector’s momentum.

Investors should note that there is only one pure play CARZ in the space that provides global exposure to nearly 40 auto stocks by tracking the NASDAQ OMX Global Auto Index. CARZ has a Zacks ETF Rank #2 (Buy) and is up 1.4% so far this year (as of December 1, 2015).

Transportation – iShares Dow Jones Transportation Average Fund (IYT)

This is yet another sector which failed to make the most of improving economic activities. The sector’s pricing is down 13.2% year to date. While a strong dollar will definitely play foul with the profits of big transporters, tailwinds including a stepped-up economy and cheap fuel are still in fine fettle. This raises optimism on the future of the transportation sector.

This is especially true as total earnings of the sector were up 22.5% in Q3 while revenues declined 1.3%. This is much better than Q2 earnings growth of 9.4% and revenue decline of 1.9% for the same period. Revenues are forecast to grow from the first quarter of 2016.
The current and the next year P/Es for the sector are 12.2 times each, reflecting a 30.7% and 24.7% discount to the S&P 500, respectively (read: Transport ETFs Modestly Up on Q3 Earnings).            

One way to play this trend is with IYT, which tracks the Dow Jones Transportation Average Index that holds 20 stocks in its basket. The fund has a Zacks ETF Rank #3 (Hold) with a High risk outlook. The fund is off 10% so far this year (as of December 1, 2015).

Finance – SPDR S&P Regional Banking ETF (KRE - ETF report) 

With the looming prospect of a lift-off, all eyes will be on financial stocks and ETFs. While the operating backdrop of financial stocks has improved a lot from the recession-cursed phase, a potential rising rate environment is another positive for the financial ETFs.

The space has a current-year P/E of 13.6 times, reflecting a 22.7% discount to the S&P while its next year P/E stands at 12.8 times, a 21% discount to the S&P 500’s 2016 P/E. The space has lost 1.7% so far this year (as of November 27, 2015).

While there are plenty of financial ETFs, investors can take a look at Zacks #2 ETF KRE. The bank fund is up 12.4% so far this year (read: Buy Regional Bank ETFs Ahead of Fed Rate Hike).

Utilities – PowerShares S&P SmallCap Utilities ETF (PSCU - ETF report)

Utilities will be hurt by the Fed lift-off as this sector underperforms in a rising rate environment.  But the space is expected to score positive earnings growth from the second quarter of 2016. 

The space has a current-year P/E of 15.7 times, reflecting a 10.8% discount to the S&P while its next year P/E stands at 15.3 times, a 5.6% discount to the S&P 500’s 2016 P/E. The space has lost 13.4% so far this year (as of November 27, 2015).

However, investors should note that utility is a risky bet at this point of time. We thus highlight the small-cap utility ETF as small-cap stocks deal more with the reasonably expanding U.S. economy and also offer less exposure to the greenback. PSCU is up 4.1% so far this year (as of December 1, 2015).