Which stock market sectors are the most undervalued?

The FTSE 100 and the S&P 500 are both up since the start of the year. Despite this, I think there are still bargains in today’s stock market. 

Some sectors have seen big declines since the New Year. But investors should be careful – not every falling share price is a buying opportunity.

Consumer pressure

Consumer spending has been under pressure in the UK, the US, Europe and China. And that has been leading to weaker returns for companies that rely on people having disposable income.

One reason for this is higher interest rates. Consumers might be getting more interest on their savings, but they’re also paying way more on their debts. 

As a result, households have had less disposable income. And share prices have been reflecting this, especially in the consumer discretionary sector. 

Wizz Air (LSE:WIZZ) shares are down 41% over the last year and recreational vehicle company Polaris (NYSE:PII) has seen its stock fall 23%. But the two look very different to me.

Wizz Air

Shares in Wizz might be down, but I view this one as a value trap. As the pandemic demonstrated, airline costs stay largely fixed even if demand falls, meaning profits can drop away quickly.

Wizz is still anticipating decent profits this year. Net income of between £420m and £500m this year makes the stock look cheap with a market cap of £1.3bn.

The trouble is, I think the business is in a difficult long-term position. The company’s debt climbed during the Covid-19 travel restrictions and it hasn’t reduced since.

Wizz Air Total Debt 2014-24

Created at TradingView

Higher debt increases the extent to which the firm stands to benefit from lower interest rates. But this isn’t enough to change my view that the risks here are significant.

Polaris

The Polaris share price hasn’t fallen as much over the last 12 months. But there are a couple of reasons I much prefer it from an investment perspective. 

One is that it has a genuinely powerful brand – it’s one of the oldest names in power sports. Another is a balance sheet where total debt is roughly in line with 2018 levels. 

Polaris Total Debt 2014-24

Created at TradingView

In an industry with low switching costs, it can be difficult to retain customers, which is a risk with the company. But the stock is currently unusually cheap on a price-to-sales basis.

Polaris P/S ratio 2014-24

Created at TradingView

I don’t envisage the downturn in the US economy lasting forever. And I think Polaris could be a big beneficiary when consumer spending starts to recover.

Undervalued stocks

I think the consumer discretionary sector is the place for opportunistic investors to look for opportunities right now. But a stock’s decline isn’t a measure of how undervalued it is.

Some businesses can handle a difficult trading period than others. The key to investing well is finding those that limit the damage in the short term and recover strongly in the future.

The post Which stock market sectors are the most undervalued? appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.