With the S&P 500 having dropped 14% this year, you might be thinking now is a time to swoop in for bargains.
If so, you may want to consider Morningstar’s roster of the 10 most undervalued stocks on its “Best Companies to Own” list.
The companies on that “Best” list are assigned wide moats by Morningstar, which means it thinks the companies will produce returns that outweigh their costs for the next 20 years or more.
The strength of the companies’ competitive advantages is either steady or increasing.
The “Best Companies” also have predictable cash flows and strong records on environmental, social and governance issues.
Here are the 10 most undervalued stocks on the “Best Companies” list. Undervaluation is measured in comparison with Morningstar’s fair-value estimate for a stock.
The metric used is a ratio of the company’s actual share price as of May 31 to Morningstar’s fair value estimate.
The list is in order of valuation, with the most undervalued company first.
1. Salesforce (CRM), the business software giant. Valuation ratio: 0.5. (Salesforce stock has risen sharply since May 31, putting its ratio at 0.61 as of June 3.)
2. Yum China (YUMC), which includes KFC and Pizza Hut in China. Valuation ratio: 0.53
3. Taiwan Semiconductor (TSM), the world’s largest dedicated contract chipmaker. Valuation ratio: 0.56
4. Veeva Systems (VEEV), which provides software for the life sciences industry. Valuation ratio: 0.62
5. Equifax (EFX), the credit bureau. Valuation ratio: 0.63
6. Anheuser-Busch InBev (BUD), the brewer. Valuation ratio: 0.63
7. Guidewire Software (GWRE), which provides software for insurance companies. Valuation ratio: 0.63
8. ServiceNow (NOW), which provides information technology services. Valuation ratio: 0.67
9. Tyler Technologies (TYL), which provides government software. Valuation ratio: 0.67
10. Adobe (ADBE), the content creation software company. Valuation ratio: 0.68.
Morningstar’s Take on Salesforce...
“While the enterprise cloud computing solution provider likely faces a dip in revenue growth below 20% at some point in the next few years, we think ongoing margin expansion will provide compound earnings growth of more than 20% for much longer,” Morningstar writes.
“Salesforce has assembled a front-office empire it can build on for years to come.”
...and on Anheuser-Busch
“The company has a history of buying brands with promising growth platforms and then expanding distribution while ruthlessly squeezing costs from the businesses, which contributes to the company’s exemplary Morningstar Capital Allocation Rating,” Morningstar said.
“AB InBev has one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators.”
The author of this story owns shares of Salesforce and Adobe.
