Seven magnificent stocks drove most of the S&P 500's gains this year. But only one of them is still undervalued, says Morningstar.
Alphabet is the only stock among the so-called "Magnificent 7" that's still trading below its intrinsic value, Morningstar's U.S. Market Strategist David Sekera says. That makes the stock very unusual in the S&P 500 — which itself is up so much it's no longer a bargain.
For one thing, Alphabet's shares remain undervalued even though the S&P 500's more than 20% gain this year makes the market "fairly valued," Sekera says. And following a monster 39% gain by tech stocks this year, four of the Magnificent 7, Microsoft, Meta Platforms, Amazon.com and Tesla, are fairly valued. And two, Apple and Nvidia, are actually overvalued, he says.
Where can S&P 500 investors still find good buys?
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Connecting With S&P 500 Communications Stocks
Where are the most undervalued S&P 500 stocks Morningstar found? Surprisingly in the communications services sector, Sekera says.
It's surprising as the Communications Services Select Sector SPDR ETF is up 40% this year. That makes it the top-performing sector this year. It even tops the Technology Select Sector SPDR ETF, which is up 37.4% this year.
You'll find values, though, inside the communications sector. That includes Alphabet, which has seen shares gain roughly 50% this year. Even so, the stock is still 18% undervalued, Morningstar says. The stock trades for 28 times its earnings in the past 12 months. That's only a slight premium to the S&P 500's P-E of 22. And yet, Alphabet's profit is expected to rise 22% this year, lapping the S&P 500 where profit is seen growing half that fast.
But Morningstar sees even more value in the fallen communications giants AT&T and Verizon. Both pay more than 7% in dividends, which remains attractive even in an age of 5% or higher savings account interest rates. Additionally, both are 37% undervalued, Morningstar says.
Other S&P 500 Sectors Of Value
Following communications services, investors can also find undervalued stocks in real estate, Morningstar says.
The Real Estate Select Sector SPDR ETF is only up 1% this year. The work-from-home trend is depressing real-estate valuations. Office occupancies are hovering at just 50%. But Morningstar thinks other areas of real estate, like retail, are ready for a recovery.
Morningstar also sees value in financials. The Financial Select Sector SPDR gained just 2% this year as the sector shakes off fears of banks failures from earlier in the year. "The sector is under pressure, but the business model is not broken," Sekera said. "We see many undervalued opportunities."
Morningstar also thinks value-priced and small stocks, which are undervalued, are the best bets going forward.
What To Sell? Most Technology Plays
Technology stocks are now the most overvalued in the S&P 500, Sekera says. They are trading for 11% over their intrinsic value.
So if you didn't buy the runaway tech leaders like Nvidia already, don't. And if you own them, think about taking some off the table, Sekera says.
"This is an opportune time for investors to take gains where stocks have become overvalued and overextended and reinvest those proceeds in those areas that remain undervalued and unloved," he said.
Finding Value In 'Magnificent 7' Stocks
Morningstar says only Alphabet is undervalued
Company | Symbol | Morningstar valuation | YTD | Sector |
---|---|---|---|---|
Nvidia | Overvalued | 205.8% | Information Technology | |
Meta Platforms | Fair value | 158.2% | Communication Services | |
Tesla | Fair value | 106.1% | Consumer Discretionary | |
Amazon.com | Fair value | 66.2% | Consumer Discretionary | |
Alphabet | Undervalued | 45.2% | Communication Services | |
Apple | Overvalued | 40.1% | Information Technology | |
Microsoft | Fair value | 36.7% | Information Technology |