There's a bright side to the S&P 500's sell-off — stocks are now 11% undervalued, says Morningstar. And there are ways to profit from this rare opportunity.
Seven stocks — several in the S&P 500 among them — including utilities Entergy and NextEra Energy plus real estate firm Simon Property Group, are the best opportunities in this market that's on sale, says David Sekera, chief U.S. market strategist at Morningstar. And he's worth listening to, as he warned S&P 500 investors to lighten up on positions in early August, just shortly after the S&P 500 started skidding.
Now's the time, though, to capitalize on a discount on stocks. It's a rare opportunity that's only happened 12% of the time since 2011, Sekera says.
Searching For Opportunity In an S&P 500 That's On Sale
Sekera points to utilities as being the best place to score from the S&P 500's recent troubles.
Utility stocks tend to pay "high and steady dividend payments," Sekera said. And for that reason, they're often a substitute for bonds. But Morningstar likes utilities best as the dividend payments will likely rise and the "underlying fundamentals in the sector are better than they have been in decades."
Take Entergy as an example. The New Orleans-based power utility yields 4.6%, which is competitive with savings accounts and Treasuries. And yet, it's growing, too. Analysts think the company will make $6.73 and $7.19 a share in 2023 and 2024 respectively. That translates into nearly 5% growth in 2023 and 6.8% growth in 2024. As such, the stock is nearly 20% undervalued, Sekera says.
Similarly, Juno Beach, Fla.-based NextEra yields a respectable 3.1%. And on top that, the company is expected to boost its adjusted profit per share by nearly 8% this year to $3.13. Morningstar analysts think the stock, down 28% this year, is now nearly 30% undervalued.
Real Opportunities, Too
Morningstar's Sekera, though, isn't completely focused on utilities. He thinks real estate offers big upside as many investors have sold off the S&P 500 sector too much.
"While valuations among urban office space remain muddy, we see a significant amount of undervaluation in other areas of the real estate market," he said. Such dislocation offers openings for investors. Take Simon Property, an Indianapolis-based owner of shopping and entertainment properties.
The stock is down nearly 5% this year. And yet, it yields an impressive 6.6%. Despite all the doom and gloom in the real estate industry, analysts think the company's adjusted profit per share will rise nearly 20% in 2023. As such, Morningstar figures the company is more than 25% undervalued.
Beware What's Next
Sell-offs can present opportunities if you follow prudent rules. But Morningstar is cognizant of the issues that could still dog markets.
Morningstar is bracing for a bit of an economic slowdown as high interest rates put the brakes on. "We project that economic growth in the fourth quarter will slow to less than half of that in the third quarter," Sekera said. "According to our forecast, we foresee the rate of economic growth will decelerate sequentially until bottoming out in the third quarter of 2024, before beginning to accelerate."
With that said, Sekera doesn't think long-term Treasuries will linger above 5%. And once rising rates cool down, the rush will be on to find stocks to buy again.
Morningstar's Most Attractive Stocks
Many are in the S&P 500
| Company | Symbol | July % ch. | Yield | Sector |
|---|---|---|---|---|
| Entergy | -4.3% | 4.6 | Utilities | |
| Duke Energy | -3.4 | 4.6 | Utilities | |
| NextEra Energy | -18.8 | 3.1 | Utilities | |
| Simon Property Group | -5.5 | 6.6 | Real Estate | |
| Ventas | -9.2 | 4.1 | Real Estate | |
| Digital Realty Trust | 6.6 | 3.7 | Real Estate | |
| American Tower | 0.3 | 3.5 | Real Estate |
