The S&P 500 is "significantly undervalued," says Morningstar, but making money with stocks will still be a "rough road." That's why it's wise to find undervalued stocks with unassailable businesses.
In its just-released second-quarter market outlook, Morningstar says it found stocks that fit the bill. The investment analysis firm names 10 stocks, including TransUnion, U.S. Bancorp and Western Union, it says are not only the most undervalued, but also have wide "moats" protecting their businesses from competition. Moats are economic advantages that hold rivals away, much like a moat keeps marauders away from a castle.
And it's with stocks like these, Morningstar sees an opportunity for patient investors to jump in.
"For investors with a long-term investment orientation, we think there is enough margin of safety in the market to use sell-offs to judiciously add to equity exposures," said Dave Sekera, senior market strategist and author of the report.
The S&P 500 Looks Undervalued: Morningstar
The S&P 500 rallied 2% in March. Even so, the market is still cheap, Morningstar said.
The more than 700 stocks that Morningstar monitors on U.S. exchanges are trading at a 12% discount to their intrinsic value. Interestingly, Morningstar finds growth and value stocks to be almost equally undervalued. And as far as size goes, Sekera sees the greatest discounts with small-company stocks, which are trading for a 33% discount to intrinsic value.
Seeing stocks so undervalued is unusual. Sekera found the market to be this cheap only 10% of the time since the end of 2010. Some of the discounting is due to the banking crisis. But that's not enough to justify the selling.
"There may be additional bank failures, (but) we do not think this is the beginning of a new financial crisis," Sekera said. "Except for the rapidity as to how fast these stock prices have fallen, the current situation is much different from what prompted the 2008 global financial crisis. While there are negative economic and market consequences to this liquidity crunch, it will not result in a wholesale freeze across the financial system."
And that's why Morningstar is brazenly calling for some financial stocks to still pay off. "We think this is an opportune time to look for stocks that have been unfairly dragged down with the carnage across the financial sector," Sekera said.
Finding "Undervalued" Stocks With Wide Moats
Stocks don't have to fall in value this year to be undervalued. Half the stocks Morningstar highlights are up this year.
And that includes the wide-moat stock Morningstar says is the cheapest: TransUnion. The credit reporting agency is a deep value, trading for nearly 40% off its fair value of 99 a share, says Morningstar. Due to a slowdown in the economy, analysts expect the company's profit to sag 3% this year to $3.51 a share, says S&P Global Market Intelligence. But profit is seen bouncing back by more than 19% in 2024, thanks to the high barriers to competition.
On the other hand, shares of U.S. Bancorp, another stock Morningstar says is cheap, is down nearly 20% this year. That means its also nearly 40% off its intrinsic value of 58 a share. Morningstar thinks the Minneapolis-based bank is going to be a survivor. Analysts seem to agree. Even in 2023, a year of banking tumult, the bank's profits are expected to jump by more than 33%. And it's not just a blip, either. Analysts are calling for another nearly 8% gain in profit in 2024.
Cheap stocks, it's true, are often cheap for a reason. Savvy investors are often best off buying the S&P 500 leaders. But if you're looking for discounted stocks with lasting power, Morningstar says this market is giving you plenty of opportunities.
"Undervalued" Stocks With Wide Moats
Morningstar names solid stocks it says are cheaper than they should be
| Company | Symbol | Year-to-date % ch. | Sector | % Undervalued |
|---|---|---|---|---|
| TransUnion | 6.4% | Industrials | 39.0% | |
| U.S. Bancorp | -19.8% | Financials | 39.7% | |
| Western Union | -21.2% | Financials | 39.8% | |
| Comcast | 8.7% | Communication Services | 36.6% | |
| Equifax | 2.8% | Industrials | 36.6% | |
| International Flavors & Fragrances | -14.4% | Materials | 35.9% | |
| Wells Fargo | -10.9% | Financials | 36.5% | |
| John Wiley & Sons | -5.9% | Communication Services | 28.9% | |
| Tyler Technologies | 7.9% | Information Technology | 26.8% | |
| Medtronic | 3.2% | Health Care | 28.4% |
Sources: Morningstar, S&P Global Market Intelligence, IBD
Follow Matt Krantz on Twitter @mattkrantz
