33 Undervalued Stocks for 2022
Here’s the new list of Morningstar’s top analyst picks for the fourth quarter.
The U.S. stock market’s bounce over the summer was short-lived: Stocks finished the third quarter down more than 4%, as measured by the Morningstar US Market Index. Stubbornly high inflation, rising interest rates, and talk of a possible economic recession continued to rattle markets during 2022′s third quarter. The U.S. stock market was down nearly 25% for the year to date by the end of September.
Heading into the fourth quarter, stocks look downright cheap according to our metrics: The median stock in Morningstar’s North American coverage traded at more than a 20% discount to our fair value estimate.
“It appears to us that the market has overcorrected to the downside,” writes Morningstar chief U.S. market strategist Dave Sekera in his latest stock market outlook.
Stocks look undervalued almost across the board viewed through several different lenses:
Here’s the list of Morningstar’s top stock picks for the fourth quarter of 2022.
Here’s a brief summary of how valuations stack up across sectors, along with some key Morningstar metrics about each stock pick. Data is as of Sept. 30, 2022.
Basic-materials stocks lagged the broader market during the third quarter of 2022 by about 4 full percentage points: Morningstar sector strategist Seth Goldstein reports that nearly two thirds of the names that Morningstar covers are trading at 4- and 5-star levels. While building-materials stocks remain fairly valued, most of the stocks in the chemicals industry are undervalued, with about two thirds of the stocks in the metals and mining industry and about half of the stocks in the agriculture industry trading below fair value, too.
Negative sentiment persisted for the communication services sector during the third quarter, with the group again lagging the broader market, observes Morningstar sector director Mike Hodel. U.S. telecom stocks were his especially hard, and pessimism engulfs media stocks, as investors question the business model. Most of the names that Morningstar covers in the sector ended the quarter in undervalued territory, and none are overvalued. “We continue to see bargains among the carnage,” notes Hodel.
Consumer cyclical stocks, as a group, posted gains in the third quarter versus a loss for the broader market. Despite the rally, the stocks we cover in the consumer cyclical sector are 25% undervalued, with 72% of the stocks trading in 4- and 5-star range. Morningstar sector director Erin Lash thinks near-term concerns over consumer willingness to spend continues to weigh on shares. We think travel and leisure and apparel retail are among the most undervalued industries within the sector, she adds. There are fewer bargains in the restaurant subsector.
Bath & Body Works
Consumer defensive stocks lost ground during the third quarter, in line with the broader market. “Supply chain issues have served to upend stock at the shelf and compound cost pressures,” says Morningstar’s Lash. Even after a tough quarter, though, the sector remains fully valued, trading at just a 3% discount to our fair value estimates. There are pockets of opportunity in the sector: Stocks in the alcoholic beverage and consumer packaged goods industries remain undervalued.
Hain Celestial Group
Energy stocks lost some ground during the third quarter as a slowing demand outlook helped alleviate tightness in global oil markets, says Morningstar sector director David Meats. Given their outperformance during the past 12 months, however, energy stocks are only about 9% undervalued as a group. Stocks in the oil-services segment look particularly attractive, trading at an average discount of 33% to our fair value estimates.
Financial-services stocks outperformed the broader market during the third quarter but still endured losses. The average financial-services stock we cover is about 23% undervalued, reports Morningstar sector director Michael Wong. In fact, about 77% of the financial-services stocks we cover are trading below their fair values, with the most opportunities among the credit services firms, asset managers, and banks.
Healthcare stocks suffered losses during the third quarter. However, given its defensive nature, the healthcare sector is only modestly undervalued, with the average stock trading about 6% below fair value. Half of the healthcare stocks we cover are trading in 4- and 5-star range, reports Morningstar sector director Damien Conover. Biopharma stocks look particularly undervalued given what we view as exponential growth potential. “While the new U.S. drug policies embedded within the Inflation Reduction Act may create headwinds, we view the changes as manageable,” he argues.
Industrials stocks outperformed the broader market during the third quarter of 2022, yet the sector remains about 17% undervalued. “Concerns of an imminent economic recession have led to a precipitous selloff in the industrial products industry,” says Morningstar sector director Brian Bernard. About two thirds of the stocks we cover in the industry are undervalued. More than half of the stocks in the transportation, business services, and construction subsectors look undervalued, too.
Delta Air Lines
Real estate stocks significantly underperformed the broad market during the third quarter; the sector is now trading at a 17% discount to our fair value estimate. Rising interest rates have led to a decline in the sector’s performance despite strong fundamental growth, says Morningstar senior equity analyst Kevin Brown. In particular, income investors have reduced their REIT exposure as bond yields have risen. “We believe the short-term disruption to the sector has created significant discounts for investors looking to increase their real estate exposure,” asserts Brown.
Park Hotels & Resorts
Simon Property Group
Technology stocks performed on par with the broader market during the third quarter, leaving the tech sector trading about 22% below our fair value estimate going into the fourth quarter—a significant reversal from just one year ago, explains Morningstar sector director Brian Colello. Software stocks are about 28% undervalued, while semiconductor stocks are trading at a 26% discount to fair value and hardware stocks at a 25% discount. “For long-term patient investors, we would still recommend high quality, wide-moat names in software and semis,” concludes Colello.
Utilities stocks continued to outperform the broader market during the third quarter, despite high inflation and rising interest rates. “Utilities have benefited from the market’s recession concerns,” explains Morningstar senior equity analyst Travis Miller. As a result, utilities stocks, as a group, look about 3% overvalued. The sector looks vulnerable, warns Miller, especially as U.S. Treasuries rates topped the Morningstar US Utilities Index‘s dividend yield for the first time in 14 years.
Undervalued stocks are those that trade below what they’re worth. Investors can turn to several metrics to gauge a stock’s worth. Some investors use standard metrics, such as price/earnings or price/cash flow. Others may look at a stock’s price relative to a company’s future growth prospects, or where a stock is trading relative to its 52-week high price.
At Morningstar, we define undervalued stocks as those that are trading below our calculated fair value estimate, adjusted for what we call uncertainty—both of which are wrapped into the Morningstar Rating for stocks. Stocks rated 4 and 5 stars are undervalued; those rated 3 stars are fairly valued; and those rated 1 or 2 stars are overvalued. For more about how we calculate our fair value estimates, think about uncertainty, and more, read Morningstar’s Guide to Stock Investing.
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Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.