Growth stocks have vastly outperformed value stocks so far this year, with the latter at a 15% discount to Morningstar’s fair-value estimates.
That's compared with an 8% undervaluation for growth stocks, so if you’re looking to buy equities, now may be a good time to consider value stocks.
In an internal Morningstar interview, Dave Sekera, chief U.S. market strategist for the firm, recommends having a look at these five undervalued value stocks. “Undervalued” means they trade below Morningstar’s fair value estimates.
Macerich
(MAC)
An owner of Class A shopping malls. Morningstar moat (durable competitive advantage) rating: no moat. Morningstar fair value estimate: $26.50. Recent quote: $9.55.
“The death of shopping malls has been greatly exaggerated,” Sekera said. “Consumers are returning to malls.”
In addition, Class A malls are evolving to include more than retailers, he said. There’s an increase in restaurants, health clubs and doctors’ offices. Sekera also likes Macerich’s dividend yield – 7.2% on a forward basis.
Carnival
(CCL)
A big cruise line. Morningstar moat: none. Morningstar fair value estimate: $22. Recent quote: $10.25.
The theme here is normalization of consumer behavior. All the major cruise lines are undervalued, Sekera said. As for Carnival, it’s bookings continue to grow, and it has been able to implement price increases. “There has been a big uptick in consumer deposits, showing a commitment in advance for travel,” he said.
In the next two years the headwinds of a strong dollar and high fuel prices should normalize, allowing Carnival’s profit margins to rebound to historical averages, Sekera said.
Borg Warner
(BWA)
An auto parts supplier. Morningstar moat: narrow. Morningstar fair value estimate: $81. Recent quote: $44.80.
Morningstar predicts that by 2030, two-thirds of new autos produced will be electrified – all-electric or hybrid. “BorgWarner has one of the stronger product portfolios for electric vehicles,” Sekera said. “Regardless of which EV manufacturer does best, BorgWarner will benefit.”
Medtronic
(MDT)
A medical device maker. Morningstar moat: wide. Morningstar fair value estimate: $112. Recent quote: $89.70.
“It’s the largest pureplay medical device maker,” Sekera said. “We’re still seeing a backlog of deferred medical procedures from the pandemic.” In addition, “this is one of the best-positioned stocks for the aging of the baby boom generation.”
Citigroup
(C)
The big bank. Morningstar moat: none. Morningstar fair value estimate: $75. Recent quote: $46.30.
The stock trades at a 40% discount to tangible book value, Sekera said. “We aren’t looking for much: we don’t see strong earnings growth. They might even have to take small hits to capital,” as the bank restructures.
But, “over time, they should earn back their cost of capital,” he said. “Then the stock will rise toward tangible book value. The other three biggest banks [JPMorgan Chase, Bank of America and Wells Fargo] are trading at or above that level.”
And while you wait for that stock appreciation, you get a 4.5% dividend yield, Sekera noted.
