Investor Insights:
Investors are paying too much for stocks.
A handful of overvalued tech companies such as Apple have driven major stock indexes higher over the past year.
So, investors are ignoring their instincts to buy undervalued stocks. Instead, they’re paying a premium to be a part of the risky, much-lauded rise.
For example, Apple has a price-to-earnings (P/E) ratio of 23. That’s the highest since 2007, when the iPhone first debuted and the company’s revenue and profits were growing at far faster rates than now.
That increases the likelihood of a much steeper sell-off. When investors realize they’re paying far too much relative to Apple’s overall profits and growth — a topic I warned about last month while making my “3 Shocking Predictions for 2020” — they’ll sell.
But there’s a way you can get ahead of this fast-approaching shift.
One group of international stocks is momentarily out of favor with investors despite offering far better opportunities than U.S. counterparts.
As a result, the shares remain at bargain-price levels.
I believe 2020 is the year emerging markets move to center stage for U.S. investors.
Since the start of the year, the iShares MSCI Emerging Markets ETF (NYSE: EEM) has posted gains of 2.6%, almost twice that of the S&P 500 Index.
Likewise, since August, the exchange-traded fund (ETF) is up 16% — three percentage points better than the U.S. index.
EEM Beats the S&P 500 Since August
(Source: TradingView.com)
Better yet, at a recent $46 a share, the fund is still trading below its last attempt at making new all-time highs in the $58 range.
The reason that’s important?
According to Yardeni Research, emerging-market stocks trade at a P/E ratio of 12.7. Meanwhile, investors are more than happy to pay an inflated P/E ratio of more than 18 to own a basket of U.S.-based companies.
Put simply, emerging-market stocks are likely to fall a lot less on average than Apple and the rest of its Big Tech brethren when the next correction arrives sometime this year.
And following that correction, the same basket of international stocks is likely to keep rising as more investors rediscover this undervalued, underowned corner of the global equity markets.
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