Rich Pickings For Bargain Hunters

Which sectors look the cheapest at the moment?

After a torrid start, the FTSE had a superb 2009 -- overall, in fact, its best performance in years. And that will have surprised many who bought into the argument that the recession would be steep and long-lasting, with a resulting long, slow gentle stock market recovery that would be measured in years not months.

As I've written, I certainly regret not investing more during 2009, thanks to a sadly depleted war chest and too many other calls on scarce family finances. Roll the clock back to March, and it's clear that there were some superb bargains to be had, on offer at fire sale prices. The markets were pricing in much more gloom than was warranted.

Is it too late?

But while the market overall had a strong 2009, buoyed by better economic news, not every part of the economy has recovered from the recession as quickly. Some sectors, in short, are still mired in gloom.

And for investors, the good news is that as the economic recovery continues, shares in these sectors should also have their day. So while 2009 saw missed opportunities, 2010 still has bargains on offer.

Take a look, and you'll see what I mean.

Fairly valued

Let's start by looking at three main indices: the FTSE 100, FTSE 250, and FTSE All Share. Overall, as glance at the P/E confirms, the market is quite highly valued by historical standards, and far from a screaming buy. The yields on offer tell a similar tale: while still a lot better than a bank account, they have been more generous in the past. 

^{Source: FTSE Actuaries, Dec 31st}

But those overall performances mask some strong sector and sub-sector-specific differences. While some sectors are cheap, others are relatively expensive.

The Oil & Gas sector, for instance, is trading on a P/E of over 21, as investors take note of strong demand for oil and rising crude prices. At 25.1, Utilities, too, are pricey -- and even Banks are trading at an eye-watering 25.4, helping to boost the overall P/E even higher. 

In some cases, these high P/E ratios arise due to heavy losses in a few companies or profit dips that are likely to be temporary in nature. So, even where the overall sector P/E is higher than the market average, there could still be bargains if you look a little closer. 

Walking wounded

Obviously, sectors with P/Es lower than the market average are more likely to contain cheap companies. The table below contains a list of them. Some of the dividend yields have echoes of what we were seeing last year -- they offer a tasty combination of capital appreciation and income. Take a look:

^{Source: FTSE Actuaries, Dec 31st}

Will there be screaming buys in every sector? I don't know, because I haven't yet looked at them in detail. They may turn out to be priced cheaply for a very good reason: too much debt and poor sales, for instance. Certainly, I suspect the Travel & Leisure and Construction & Materials sectors could have plenty of companies that fit that description.

But -- critically -- it shouldn't be all of them. In short, if you're looking for bargains, these sectors are far more likely to throw up good candidates.

Happy hunting!

More from Malcolm Wheatley:

• Comparing Cheap Index Trackers
• Where Was My War Chest?