There's a bright side to the S&P 500's recent slide. Some stocks are set up for likely gains, at least according to a red-hot Morningstar strategist.
Morningstar's Dave Sekera, who tipped off investors early last quarter of the Magnificent Seven's midyear troubles, now found 13 big-cap and S&P 500 stocks prime for a rally. These stocks, including Estee Lauder, U.S. Bancorp and industrial RTX, are both deeply undervalued but also sport a wide moat against competition and strong confidence from Morningstar.
"Following this pullback, we now advocate for moving back to a market weight position in growth while remaining overweight in value and underweight in core," Sekera said in his report.
Following The S&P 500 Opportunities
Morningstar's broad look at U.S. stocks finds that following the sell-off in September, they're trading 8% below fair value.
That was somewhat to expected. Following July's rally, the market, especially growth stocks like the Magnificent Seven, became fully valued to overvalued. "The market gave up those gains and then some," Sekera said.
Now, Morningstar is urging investors to add back to any reduced weighting in growth stocks to match the S&P 500. But it's finding compelling deals especially among value stocks. Morningstar is finding bigger discounts on smaller stocks, but it's still locating potential winners among big caps, like those in the S&P 500.
So what's most attractive now?
Picking Big-Cap Favorites In S&P 500 And Beyond
Morningstar's top big stock in terms of valuation is Estee Lauder. The cosmetics stock is now 42% undervalued, Morningstar says.
That's entirely due to a 43% drop in the stock's price this year to 140.89. There doesn't seem to be a fundamental reason behind this years stock fall, though. Analysts think the company will earn 5% more in fiscal 2024 ended in June. But strong growth is seen resuming in fiscal 2025 with earnings per share growth of more than 50%. As such, analysts think the stock is 24% undervalued versus their 12-month price target.
Another bargain in Morningstar's assessment is U.S. Bancorp. Morningstar calls it 35% undervalued. U.S. Bancorp, like many financials, struggled following the collapse of Silicon Valley Bank. U.S. Bancorp's shares are down 28% this year.
But the bank is still growing. Analysts think its profit will rise nearly 13% to $4.16 a share this year, says S&P Global Market Intelligence.
Watch The Economy
Much hinges, of course, on what the Federal Reserve ends up doing with short-term interest rates. That will dictate if undervalued S&P 500 stocks sink further.
Morningstar thinks the hike in rates in July to a range of 5.25% to 5.5% is the "final interest rate increase of this monetary policy tightening cycle." Slowing economic growth might lead to a rate cut in March 2024, it says.
And that's a decent setup for some undervalued stocks.
"The market is slightly undervalued, inflation moderating, interest rates have, or are near, their peak, and while economic growth is slowing, we do not expect a recession and see stronger economic growth beginning in the latter half of 2024," Morningstar said.
Morningstar's Most Undervalued Big Stocks
All have wide moats and good estimate certainty
| Company | Symbol | Undervalued | Sector |
|---|---|---|---|
| Estee Lauder | 42.0% | Consumer Staples | |
| U.S. Bancorp | 35.0 | Financials | |
| RTX | 35.0 | Industrials | |
| Yum China Holdings | 33.0 | Consumer Discretionary | |
| Wells Fargo | 32.0 | Financials | |
| Pfizer | 31.0 | Health Care | |
| Medtronic | 29.0 | Health Care | |
| Comcast | 25.0 | Communication Services | |
| Kenvue | 24.0 | Consumer Staples | |
| Gilead Sciences | 23.0 | Health Care | |
| Intercontinental Exchange | 20.0 | Financials | |
| Altria Group | 19.0 | Consumer Staples | |
| Ecolab | 19.0 | Materials |
