10 of the cheapest US stocks of 2022
One silver lining of the bear market is half the US stocks followed by Morningstar analysts are now undervalued.
Mentioned: Altice USA Inc (ATUS), Farfetch Ltd (FTCH), Lyft Inc (LYFT), I-MAB (IMAB), SoFi Technologies Inc (SOFI), Nissan Motor Co Ltd (7201), Tilray Brands Inc (TLRY), Groupon Inc (GRPN), Hanesbrands Inc (HBI), WW International Inc (WW)
There’s one good thing about a bear market: For investors looking to put money to work, stocks end up cheaper than they were before it started.
Valuations for the US market did a flip-flop from the start of the year, with Morningstar analysts now viewing the market as 11% undervalued, compared with 6% overvalued during its peak on January 3.
As of December 14, 421 of the 846, or about 50%, of the US-listed stocks covered by Morningstar analysts are undervalued—having a Morningstar Rating of 4 or 5 stars. About 305 of them are considered 20% undervalued or more. At the start of the year, only 221 stocks were considered undervalued, and 126 were 20% undervalued or more.
Heading into the final days of 2022, here are the stocks trading at their biggest discounts to their Morningstar fair value estimates:
The bear market knocked down stocks of all stripes, including high-quality companies that Morningstar’s stock analysts assigned a Morningstar Economic Moat Rating of wide or narrow to, meaning they have durable competitive advantages over their peers.
Companies with wide moats are expected to retain their competitive advantages for more than 20 years, while those with a narrow moat can fend off competition for 10 years.
In fact, about 274 of the undervalued stocks have a narrow or wide moat rating.
To build a list of undervalued quality stocks, we screened for stocks that had a rating of 4- or 5-stars, and then sorted the results by each stock’s price/fair value ratio. This ratio measures a stock’s most recent closing price against its Morningstar fair value estimate
Stocks with a price/fair value ratio closer to 0.0 are considered undervalued, while stocks with a ratio of 1.0 or higher are viewed as overvalued Morningstar analysts.
Below, we’ve highlighted four stocks that have the highest discount to their fair value ratio among all of the 846 US-listed stocks covered by Morningstar analysts.
- Economic Moat: None
- Discount: 88%
“I-Mab Biopharma (NAS:IMAB) is a clinical-stage Chinese biotech firm with strong innovative products in its pipeline. Its first commercial drug will be felzartamab (CD38, Greater China), which could be launched in China at the end of 2023 or early 2024 for third-line multiple myeloma, or MM. Other core assets are lemzoparlimab (”lemzo,” CD47, Greater China), uliledlimab (“uli,” CD73, global rights), and eftansomatropin (long-acting growth hormone, Greater China). Although we do not award I-Mab a moat due to the early stage of its portfolio, we are impressed with its differentiation and rational design and believe it has a positive moat trend.”
— Jay Lee, senior equity analyst
- Economic Moat: Narrow
- Discount: 79%
“Altice USA (NYS:ATUS) has struggled to maintain revenue growth recently—more than cable peers Comcast and Charter—as it battles stiff competition from Verizon in the New York market. The firm has broken from its peers with plans to aggressively upgrade its networks with fiber rather than rely on traditional cable network technology. This strategy will sharply curtail free cash flow over the next few years. Still, we expect the firm’s networks will remain vital pieces of infrastructure that will generate strong, albeit slow growing, cash flow over the long term.”
— Michael Hodel, director of equity research, media and telecom
- Economic Moat: Narrow
- Discount: 78%
“While Lyft’s (NAS:LYFT) mixed third-quarter results and fourth-quarter guidance were disappointing, we continue to see strength in the firm’s network effect which has driven growth in rider monetization. We were also pleased with Lyft’s latest cost-cutting measures. However, we continue to expect lower 2024 adjusted EBITDA than the firm guided for earlier this year. We have lowered our revenue growth assumption for this year through 2026 given the ongoing uncertainty regarding the macro environment.
“In addition, while we think Lyft will remain the second-largest ride-hailing platform in the U.S., we are now assuming Uber will slightly increase its market share over Lyft during the next few years. We now see Lyft hitting GAAP profitability in 2025, a year later than we had initially projected, as we do not foresee as much operating leverage given our lower revenue growth assumption. While adjustments to our model result in a $55 fair value estimate, down from $65, we continue to view shares of this narrow-moat firm as deeply undervalued.”
— Ali Mogharabi, senior equity analyst
- Economic Moat: None
- Discount: 75%
“Farfetch (NYS:FTCH) is a leading global online distribution platform for personal luxury goods. It connects luxury buyers and sellers and offers a wide selection of products to consumers (3.9 million stock-keeping units at the end of 2017, or 10 times more than the next biggest peer, according to the company) without exposing itself to unsold inventory risk. While we believe Farfetch’s business model exhibits traces of a network advantage moat source, we are currently wary of assigning it a moat, given the early stages of industry development, the company’s small size and reach (6% share of the online luxury goods segment, reaching less than 1% of the luxury buying population), and lack of business model monetization.”
“We believe Farfetch is well-positioned to take advantage of strong growth in online luxury good buying, which we expect to increase to 35% in 2030. We expect Farfetch to increase its market share to 10% from 6% in 2021 in 10 years’ time. We forecast the company to turn profitable by 2023 and reach a high-teens margin by 2028 as operating expenses are scaled against growing revenue.”
— Jelena Sokolova, senior equity analyst