With the S&P 500 dropping 5% in the third quarter, there are some reasonably-priced opportunities available in the stock market.
Morningstar calculates that the market as a whole was 8% undervalued as of Sept. 25. So it formed a list of three undervalued stocks (based on Morningstar’s fair value estimates) to buy for the fourth quarter. Here are the winners.
Wells Fargo
Wells Fargo (WFC) -), the banking giant: Morningstar moat (durable competitive advantage) rating: wide. Morningstar fair value estimate: $61. Wednesday price quote: $38.90.
“In our list this quarter, we swapped Wells Fargo for Citibank C,” said Morningstar’s chief U.S. market strategist Dave Sekera. “Citibank still is very undervalued. We still think there’s a lot of opportunity there.”
However, “when we compared Citibank and Wells Fargo, our analytical team noted that Wells Fargo [is more profitable] and that it is further along in its turnaround,” he said.
“And then when comparing Wells to a lot of the regional banks, it isn’t dealing with any of the earnings pressure or some of the capital issues that they’re dealing with.”
Further, “despite the bank's issues, Wells Fargo remains one of the top deposit gatherers in the U.S.,” wrote Morningstar analyst Eric Compton.
Snowflake
Snowflake (SNOW) -), a data storage company: Morningstar moat: none. Morningstar fair value estimate: $231. Wednesday price quote: $151.30.
The company is one of Morningstar’s top picks in the technology sector .“Snowflake was one of those 2020-vintage initial public offerings,” Sekera said. “There was just too much hype in the [overall] IPO market and in Snowflake specifically.”
Although it doesn’t pay a dividend and it doesn’t have a moat, “we think this is a really interesting play on artificial intelligence,” Sekera said. “Snowflake is a data management provider. They host the enterprise data used to run AI models.”
The market is underestimating three factors boosting the company, wrote Morningstar analyst Julie Bhusal Sharma.
Those are datasphere (total data in existence) growth, the uniqueness of Snowflake's technology, and the powerful potential of Snowflake's “small but mighty data marketplace.”
Norfolk Southern
Norfolk Southern (NSC) -), the railroad giant: Morningstar moat rating: wide. Morningstar fair value estimate: $229. Wednesday price quote: $192.90.
The firm assigns a wide moat to most of the railroads it covers, based on their efficient scale, with monopolies on routes, and cost advantages.
Norfolk Southern is the railroad that had a February derailment in East Palestine, Ohio, with its train spewing hazardous materials into the atmosphere. The stock has tumbled 22% year to date.
Investors are acting on the view that it will be very hard to estimate the amount of Norfolk’s legal liability for remediation of the hazardous chemicals, Sekera said.
“But we think the market is significantly overestimating the current legal liability. So, at this point, that stock has fallen enough.”
