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Is The Market Due For A Correction?

I would be lying if I said I wasn’t worried about the market’s current position. After five years of gains, the FTSE 100 now stands 70% above its 2009 lows and these gains have led myself and many other investors to start questioning the markets ability to continue higher. 

That said, while some sectors of the market currently look expensive, others do not and there is still opportunity for profit. 

Pick carefully

Nonetheless, while there are some deals still to be had, some companies and sectors look expensive compared to their historic averages.

For Example, SABMiller (LSE: SAB) is currently trading at a forward P/E of 22, which is significantly above its ten-year average forward P/E of 16. Furthermore, close peers, Anheuser-Busch InBev and Heineken currently trade at a forward P/E of 15 and 12 respectively, indicating that SAB is expensive compared to its wider sector. Unfortunately, SAB’s earnings per share are only expected to expand 5% during the next financial year.

Here are some tips

However, as I have written above there are still some companies that look cheap in this market.

For example, Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), which is currently trading at a forward P/E of 10, about the same as its ten-year average. Nonetheless, Shell is currently trading at a lower price-to-book value than at any point in the past five years. Additionally, the company’s free cash flow yield is now stronger than it has been in any point during the past five years.

Jumping to the Banks sector, Standard Chartered (LSE: STAN) looks cheap trading at a forward P/E of 11 compared to its ten-year average of 13. Moreover, Standard Chartered’s closest peers, Citigroup and HSBC trade at a forward P/E of 20 and 13 respectively. Actually, according to my figures Standard Chartered achieves a better return on assets for investors than both HSBC and Citigroup, indicating that Standard Chartered should trade at a premium to its peers.

And lastly, commodities giant Rio Tinto (LSE: RIO) has caught my eye. At present Rio trades at a forward P/E of 9, which is below its ten-year historic average P/E of 10. What’s more, the company should be set to benefit from the strong iron ore price, which has rebounded to about $130 per ton during the last few months, from a low of around $70 per ton. With its low valuation investors could be missing out on Rio’s potential for profit. 

Foolish summary

So all in all, the market may not be due for a correction just yet. Indeed, while some companies and sectors currently look expensive, others including those mentioned above, do not.

Overall, there are still deals to be had in this market it just takes time to find them. 

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>Rupert owns shares in Royal Dutch Shell and Standard Chartered. The Motley Fool owns Standard Chartered.

See all articles by Rupert Hargreaves