The stellar performance by U.S. stocks in 2016 is continuing in 2017 with huge optimism. This is especially true as major bourses are hitting new highs outplaying President Donald Trump’s proposed antitrade policies thanks to the deluge of upbeat corporate earnings, improving domestic fundamentals, stabilizing oil price and the prospect of higher interest rates.

As per the latest Earnings Outlook, the Q4 earnings season is faring better than recent years with not only earnings growth on track to reach the highest level in two years but also total earnings for the quarter on track to be a new quarterly record (read: Bet on Solid Q4 Earnings Growth with These ETFs).

The U.S. economy is clearly on solid ground buoyed by an impressive labor market, rising wages, slowly rising inflation, and increasing consumer spending. Americans have an optimistic view of the economy with confidence hitting the highest level in 13 years. The University of Michigan consumer sentiment index rose to 98.5 in January from 98.2 in December, suggesting growing optimism on pro-growth policies.

Additionally, a slew of proposed reforms on deregulation, big spending, and tax cuts are providing boost to the stock prices. The President is expected to release a much-anticipated plan for tax cuts within the next three weeks. However, geopolitical tensions, series of elections and referendum in Europe, and threats of political instability will continue to weigh on the stock performance (read: If Trump Flares Up Uncertainty, Profit from These ETFs).

While the rally has been broad-based, there is still some bargain hunting for investors in the current bullish stock market. For them, we have highlighted five ETFs and five stocks that have been selling at a bargain price. Investors could definitely look at these products for outperformance in the coming weeks.

How to Find Bargain ETFs?

Using our database, first we have selected the ETFs with a Zacks Rank #1 (Strong Buy) or 2 (Buy). This is because these ranks suggest strengthening fundamentals and superior weighting methodologies that could allow them to lead higher than their cousins in a booming market. Then, we narrowed down the list to funds having lower P/E ratio than 18.48 for the broad market fund (SPY Quick QuoteSPY - Free Report) , expense ratio of less than 0.30% and dividend yield of at least 2%. Notably, SPY is currently selling at P/E of 18.48.

Here are the five ETFs that are currently undervalued and could generate solid returns in a rising stock market.

PowerShares KBW High Dividend Yield Financial Portfolio (KBWD Quick QuoteKBWD - Free Report)

This fund provides exposure to the highest dividend-yielding stocks of the broad U.S. financial space, including banking, insurance, and diversified financial services. It tracks the KBW Nasdaq Financial Sector Dividend Yield Index.

Zacks ETF Rank: #2
P/E Ratio: 11.03
Expense Ratio: 0.35%
Dividend Yield: 8.46%

iShares Edge MSCI USA Value Factor ETF (VLUE Quick QuoteVLUE - Free Report)

This fund follows the MSCI USA Enhanced Value Index and offers exposure to large and mid cap U.S. stocks with lower valuations based on fundamentals.

Zacks ETF Rank: #2
P/E Ratio: 13.73
Expense Ratio: 0.15%
Dividend Yield: 2.01%

SPDR S&P 500 Value ETF (SPYV Quick QuoteSPYV - Free Report)

This ETF offers exposure to the large cap value segment of the U.S. equity market by tracking the S&P 500 Value Index (read: 6 ETF Trends Likely to Take Centre Stage in 2017).

Zacks ETF Rank: #2
P/E Ratio: 16.87
Expense Ratio: 0.15%
Dividend Yield: 2.35%

WisdomTree U.S. Quality Dividend Growth Fund (DGRW Quick QuoteDGRW - Free Report)

This fund tracks the WisdomTree U.S. Quality Dividend Growth Index and offers diversified exposure to U.S. dividend-paying stocks with both growth and quality characteristics like long-term earnings growth expectations, and three-year historical averages for return on equity and return on assets.

Zacks ETF Rank: #2
P/E Ratio: 17.57
Expense Ratio: 0.28%
Dividend Yield: 2.07%

iShares Morningstar Small-Cap Value ETF

This product follows the Morningstar Small Value Index, providing exposure to the small cap companies that are thought to be undervalued by the market relative to comparable companies.

Zacks ETF Rank: #2
P/E Ratio: 16.39
Expense Ratio: 0.30%
Dividend Yield: 2.43%

How to Find Bargain Stocks?

For this, we have used our Zacks stock screener and have selected stocks with a Zacks Rank #1 or 2 and a VGM Style Score of B or better. A top rank suggests rising earnings estimates, which indicate an optimistic view on earnings by analysts and hence higher chances of outperformance. Then we looked for stocks having a low P/E than the S&P 500 index (19.40), double-digit estimated earnings growth rate for this year and dividend yield of at least 2%.

Finally, we arrive at the five stocks that are cheap and have the potential to deliver higher returns with lower volatility.

Sprague Resources LP

Based in New Hampshire, Sprague Resources is engaged in the purchase, storage, distribution, and sale of refined petroleum products and natural gas in the United States.

Zacks Stock Rank: #2
VGM Style Score: B
P/E Ratio: 7.90
Fiscal 2017 Earnings Growth Rate: 114.32%
Dividend Yield: 8.75%

OM Asset Management plc

Based in Massachusetts, OM Asset Management operates as a multi-boutique asset management company.

Zacks Stock Rank: #1
VGM Style Score: B
P/E Ratio: 9.90
Fiscal 2017 Earnings Growth Rate: 20.94%
Dividend Yield: 2.21%

Seagate Technology plc (STX Quick QuoteSTX - Free Report)

Based in Ireland, Seagate Technology designs, produces, and distributes electronic data storage technology and solutions in Singapore, the United States, the Netherlands, and internationally (read: Technology ETFs Hitting All-Time High).

Zacks Stock Rank: #1
VGM Style Score: A
P/E Ratio: 10.15
Fiscal 2017 Earnings Growth Rate: 99.56%
Dividend Yield: 5.50%

Honda Motor Co. Ltd. (HMC Quick QuoteHMC - Free Report)

Based in Tokyo, Honda Motor is a developer, manufacturer, and global distributor of a wide range of products, including motorcycles, ATVs, generators, marine engines, lawn and garden equipment and automobiles.

Zacks Stock Rank: #1
VGM Style Score: A
P/E Ratio: 11.45
Fiscal 2017 Earnings Growth Rate: 62.94%
Dividend Yield: 2.34%

Manulife Financial Corporation (MFC Quick QuoteMFC - Free Report)

Based in Canada, Manulife Financial is engaged in providing financial protection products and investment management services to individuals, families, businesses and groups in selected international markets (read: Profit from Rising Financial Stocks with Leveraged ETFs).

Zacks Stock Rank: #1
VGM Style Score: B
P/E Ratio: 11.84
Fiscal 2017 Earnings Growth Rate: 14.94%
Dividend Yield: 2.95%

Bottom Line

Amid peak stock market and bouts of volatility, investors are seeking to invest in lower valuation stocks, which have lots of upside potential in the coming days. The above-mentioned products look compelling choices as these look undervalued than the overall market at the current levels.

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