Which sector holds the most surprising value?

Using a historical lens, Goldman Sachs finds promise in this overlooked part of the market

By Bloomberg News

Mar 9, 2015 @ 2:54 pm EST

They say when you're searching for something that seems hopelessly lost, it's always in the last place you think to look.

Like, you may find the car keys in the refrigerator. Or the remote control in the Tupperware drawer. Or, if you're looking for value in the U.S. stock market, you could find it hidden in plain sight in the Nasdaq 100 Index.

Say what? Shouldn't the Nasdaq, birthplace of the technology bubble, still be cordoned off with crime-scene tape now that everyone is questioning the "stretched'' valuations of U.S. equities?

Not according to Goldman Sachs Group Inc., which makes a compelling case for why the Nasdaq 100 offers way more value than the Standard & Poor's 500 Index these days.

The index, which can be bought through the exchange-traded fund with the ticker symbol QQQ, offers valuation that looks attractive both in its own right and when compared with the S&P; 500, according to Goldman Sachs strategists led by David Kostin. With a forward price-earnings ratio of 18.8, its valuation is currently just 8% higher than the S&P; 500's. That's close to the narrowest premium in 10 years, Goldman noted. The average is about 40% over the past 15 years and 30% during the last decade.

If you're looking for profit growth, it's also here: Earnings-per-share at Nasdaq 100 Index companies are expected to increase 15 percent in the next 12 months compared with just 5 percent for the S&P; 500, the Goldman report noted. Even excluding Apple Inc., Kostin and crew wrote that the index "has superior sales and EPS growth although the P/E expands by one point.''

Part of the story is simply the composition of the index: information technology, consumer discretionary and health-care companies make up 92 percent of the Nasdaq 100. And it has none of those pesky energy companies.

It may be worrisome to some investors that one company (Apple) accounts for almost 15% of the Nasdaq 100. That's a topic that Gina Martin Adams, senior strategist at Wells Fargo & Co., attacked in her latest report. She wrote that history suggests "single-stock concentration risk'' such as this has little to do with causing peaks in sectors of the market.

For example, she noted how Exxon Mobil Corp. peaked as a percentage of energy industry stocks long before the industry's share of the S&P; 500 did. Neither was there a correlation in the peak of financial companies' share of the S&P; 500 and JPMorgan Chase & Co.'s as the biggest company in the industry.

"Indeed, based on recent historical examples, the greater concern is when sector relative peaks are reached as a rising tide lifts all boats,'' she wrote. "While we see little risk of a bubble developing at the sector level in the stock market, investors looking to find the next sector 'bubble' in the S&P; 500 might be best served to watch for broadening, rather than narrowing, market cap concentration.''

Just like value, bubbles are sometimes in the last place you'd think to look.

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