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Market Update

8 Newly Undervalued 5-Star Stocks

Burlington Stores and Goldman Sachs stocks are among those looking more attractive as the bear market drives names further into undervalued territory.

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Now is the time investors may want to start thinking about getting greedy.

With losses accelerating in recent months as fears of a recession plague the market, the number of stocks considered undervalued breached levels seen at worst points of Covid-19 triggered recession, according to Morningstar analysts.

The U.S. market now trades at about a 15% discount, according to Morningstar analysts, as overvalued stocks drop and stocks already trading at a bargain fall further into discount territory. As of July 19, the number stocks considered undervalued rose to 514, up from 289 at the end of the first quarter, an almost 78% increase.

That tops the 509 companies that were considered undervalued at the start of the pandemic in March 2020. Stocks with Morningstar Star Ratings of 5- or 4-stars are viewed as undervalued by analysts, while those with 1- or 2-stars are overvalued.

Only 201 companies now trade over their Morningstar fair value estimates, a measure used by our analysts to determine a stock’s intrinsic value based on a discounted cash flow model. That's a 54% decline in the number of companies that were overvalued a year ago. Drugmaker Moderna (MRNA) now trades at 28% discount, according to Morningstar analysts. A year ago, it was the most overvalued stock covered by Morningstar and was trading at a premium of 168% to its fair value estimate.

In the last month, 24 stocks moved into the undervalued category as their star ratings changed to 4-stars from 3-stars. A number of them, such as Sociedad Quimica Y Minera De Chile (SQM), are from the basic materials and energy sectors after Morningstar analysts increased their fair value estimates following updated commodity price forecasts.

An additional 18 stocks fell further into undervalued territory, moving to a 5-star rating from 4-stars. To highlight these opportunities for investors, we screened for stocks that secured a 5-star rating in the last month. 

Newly Undervalued 5-Star Stocks

We then applied a Morningstar Economic Moat filter to focus on those names our analysts believe hold a competitive advantage over their peers, through things such as high switching costs or intangible assets like patents. These criteria turned up eight companies:

  1. Grupo Televisa (TV)
  2. Infineon Technologies (IFNNY)
  3. ING Groep (ING)
  4. Grifols (GRFS)
  5. Burlington Stores (BURL)
  6. Smith & Nephew (SNN)
  7. Ingersoll Rand (IR)
  8. Goldman Sachs (GS)

Grupo Televisa

“We remain bullish on Televisa's long-term prospects. Historically a powerhouse in Spanish-language media because of its programming prowess and ownership of the leading broadcast networks in Mexico, the firm merged its media business into Univision. Televisa is now focused on telecom. The firm transformed itself into a leading telecom firm in Mexico through a series of acquisitions and is now one of the country’s fastest-growing broadband providers.”

-Neil Macker, senior equity analyst

Infineon Technologies 

“Infineon is a leading broad-based European chipmaker, with substantial exposure to secular growth drivers in the industrial and automotive chip sectors. Infineon should emerge as a leading supplier for electric vehicles and active safety systems used in cars, with increasing exposure to car `infotainment' systems. However, like most chipmakers, Infineon's business remains highly cyclical as demand ebbs and flows in line with the health of its various end markets.”

-Brian Colello, director of equity research for technology

ING Groep

“Low currently negative interest rates and the impact on ING's earnings is likely to weigh on the minds of investors for the foreseeable future. While understandable, as net interest income contributed 77% of its revenue for 2020, this is unfortunate; ING is more than merely a play on European interest rates. We believe ING's strong deposit franchises in its core markets is its greatest competitive advantage. This is completely obscured in the current low interest-rate environment. In our opinion ING has surplus capital, which could boost shareholder returns and a more focused geographical strategy could drive a rerating.”

-Niklas Kammer, equity analyst

Grifols 

“Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda TAK and CSL CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.”

-Karen Andersen, healthcare sector strategist

Burlington Stores 

“Burlington has not escaped pandemic-related turmoil, but we believe it and its off-price peers are better positioned than full-price sellers. With no imminent debt maturities and ample liquidity, Burlington has been able to successfully meet a changing environment and sharply higher inflation. Although the present environment poses unique challenges, the off-price sector has performed well in adverse economic conditions historically (Ross and TJX saw low- to mid-single-digit comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.”

-Zain Akbari, equity analyst

Smith & Nephew

“Impressive innovation has allowed Smith & Nephew to carve out a slice of the orthopedic, sports medicine, and wound-care markets. Though the company is smaller than the dominant orthopedic competitors, it has punched above its weight in terms of introducing meaningful innovation with its pioneering hip resurfacing implant and knee replacements with Verilast technology, which it contends can last for 30 years. These are significant improvements that exceed the evolutionary innovation typically seen in orthopedics.”

-Debbie Wang, senior equity analyst

Ingersoll Rand IR

“On Feb. 29, 2020, Gardner Denver acquired former Ingersoll Rand’s industrial business in a transformative Reverse Morris Trust transaction. The combined entity took on the Ingersoll Rand name and stock ticker.

“Following the merger, new Ingersoll Rand is a leading mission-critical flow creation and industrial technology company. The combined entity operates under two reportable segments: 1) industrial technologies and services; and 2) precision and science technologies, including Gardner Denver's medical business. The combined business will benefit from a more comprehensive portfolio of products and services. Ingersoll Rand’s large installed base of equipment generates a relatively stable stream of aftermarket and service revenue, which accounts for roughly 36% of combined pro forma sales.”

-Krzysztof Smalec, equity analyst

Goldman Sachs 

“Goldman Sachs has made progress on the strategic plan that it laid out at the beginning of 2020 and set even more ambitious goals in 2022. The company is now targeting a medium-term return on tangible equity, or ROTE, of 15% to 17% compared with a previous goal of over 14%. In addition to the ROTE target, management also set an expense ratio goal of about 60% and growth targets for its asset-management and consumer banking businesses. While we’re not sure the company will hit all of those goals over the next three years, we forecast the company exceeding a 15% ROTE in the long run after its consumer business has reached a more profitable scale. Goldman Sachs’ trading business also remains a large swing factor, as it requires more capital and tends to have lower operating margins than the other business segments.”

-Michael Wong, director of equity research for financial services

 


 

Jakir Hossain does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.