A Simple Way to Find the Best Bargains Within a Sector

If you’re looking to invest in one sector specifically, you may come in with some perceived notion.

For instance, if you were looking to invest in an oil company, you may pick a stock where a family member or friend worked for years. If you invest in the restaurant space, it may be because it’s a place you like.

Those types of decisions are part and parcel of investing. But once you’ve narrowed down on a sector to invest, a comparative analysis can help you find the best opportunity and help reduce some of the personal bias that inevitably seeps into investing.

For instance, in the food space right now, Kraft-Heinz looks terrible. The stock chart shows a decline of over 60 percent in the past year. A company like Hershey, on the other hand, looks great thanks to a 50 percent rally in shares.

But that only tells us what the price has done lately. It doesn’t tell us anything about prices going forward.

And a look at the relative valuations of the two companies tells us that Kraft is a bargain on multiple investment metrics relative to the broader food industry—and Hershey is at a premium.

So while the recent share price indicates one thing, valuations indicate another. And, eventually, whatever positions in the market get out of whack tend to get back in line with the averages sooner or later. As with other soft data, recent chart movements provide investors with a piece of data that they may act on, even if it’s not the full picture.

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