Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

30 undervalued US stocks – part 2

Susan Dziubinski  |  16 Apr 2019Text size  Decrease  Increase  |  
Email to Friend

In part one we explored undervalued stocks across the basic materials, communications services and energy sectors that feature among our analysts' best ideas.

Now we delve into several more.

Financial Services

In the financial-services sector, we're seeing the most value among banks, with about half of the names we cover trading in 4- and 5-star range, notes sector director Michael Wong in his review. "Compared with the previous quarter, we no longer see favourable risk-adjusted returns for asset managers," adds Wong. "There's 10 per cent upside to the median price/fair value estimate of our asset management coverage after our coverage appreciated 11 per cent in the previous three months."

Top picks in the financial services sector

Top picks in the financial services sector
Company
Ticker
Last close $
Fair Value $
Discount %
Fair Value Uncertainty
Economic Moat
Amercian International Group AIG 46.19 76.00 39 Medium None
Capital One Financial COF 87.83 119.00 26 Medium Narrow
Credit Suisse Group CS 12.84 20.00 36 High Narrow

Source: Morningstar Data as of April 15, 2019 

Healthcare

The healthcare sector was fairly valued at the end of the first quarter, trading just 1 per cent below our fair value estimate. Not surprisingly, there are few buys: Only 4 per cent of our healthcare coverage universe is rated 5 stars, notes sector director Damien Conover in his update. Most of the 4- and 5-star names are drug manufacturers or healthcare providers. "In drug manufacturing, we believe the market is still ascribing too much valuation pressure on the industry due to potential negative drug pricing regulations," adds Conover.

Top picks in the healthcare sector

Top picks in the healthcare sector
Company
Ticker
Last close $
Fair Value $
Discount %
Fair Value Uncertainty
Economic Moat
Bayer BAYRY 17.24 31.00 44 High Wide
CVS Health CVS 52.81 92.00 43 Medium Narrow
McKesson Corp MCK 116.05 130.00 11 Medium Wide

Source: Morningstar Data as of April 15, 2019

Industrials

The industrials sector was trading at a slight 3 per cent discount to our fair value estimate as of quarter-end, up from a 15 per cent discount at the end of 2018, notes sector director Keith Schoonmaker in his quarterly review. The team is seeing upside in industrial distribution and logistics. "We expect distributors will leverage their selling, general, and administrative expenses to drive year-over-year operating margin improvements," he says. Moreover, most truckers are unlikely to match their rate gains in 2018, which has opened up opportunity as market valuations have corrected.

Top picks in the industrial sector

Top picks in the industrials sector
Company
Ticker
Last close $
Fair Value $
Discount %
Fair Value Uncertainty
Economic Moat
Anixter International AXE 60.73 98.00 8 Medium Narrow
WESCO International WCC 55.66 88.00 37 Medium Narrow
XPO Logistics XPO 61.00 63.19 3 High None

Source: Morningstar Data as of April 15, 2019

Real Estate

Real estate is among the most fairly valued sectors today, with the average stock in our coverage universe trading at a 4 per cent premium to our fair value estimate, says analyst Kevin Brown in his update. "Considering most of the names fall in the 3-star range, we see only a few attractively priced real estate companies and none trading at 5 stars," he notes.

Top picks in the real estate sector

Top picks in the real estate sector
Company
Ticker
Last close $
Fair Value $
Discount %
Fair Value Uncertainty
Economic Moat
Macerich Co MAC 43.52 57.00 24 High Narrow

Source: Morningstar Data as of April 15, 2019

Technology

Tech stocks snapped back in the first quarter after a dismal stretch in late 2018. As a result, the average tech stock in our coverage universe trades at just a 2 per cent discount to fair value, says sector director Brian Colello in his latest update. "Despite the recent rally in tech and in semiconductors specifically, we still think semis are the most undervalued subsector in technology, as about 30 per cent of our coverage is 4-star-rated or higher and the median chip stock is about 4 per cent below our fair value estimate," he notes. The team also thinks online media is an attractive segment.

Top picks in the technology sector

Top picks in the technology sector
Company
Ticker
Last close $
Fair Value $
Discount %
Fair Value Uncertainty
Economic Moat
Applied Materials AMAT 42.99 49.00 12 High Wide
Baidu BIDU 173.09 262.00 34 High Wide
Microchip Technology MCHP 95.36 112.00 15 Medium Wide

Source: Morningstar Data as of April 15, 2019

Utilities

Trading at a 10 per cent premium to our fair value estimate, the utilities sector is overpriced. Moreover, dividend yields remain near decade lows, points out sector strategist Travis Miller in his quarterly update. "For income investors, utilities' dividends have rarely looked so attractive," argues Miller. "U.S. utilities' 3.4 per cent average yield is 90 basis points above the 10-year U.S. Treasury yield as of late March, a reliable buy signal." Further, we think these dividends are well-covered and set to grow more than 5 per cent annually in the next three to five years, with some boasting dividend growth of 10 per cent or more.

Top picks in the utilities sector

Top picks in the utilities sector
Company
Ticker
Last close $
Fair Value $
Discount %
Fair Value Uncertainty
Economic Moat
Dominion Energy D 76.44 84.00 9 Low Wide
Edison International EIX 67.13 68.00 1 Medium Narrow

Source: Morningstar Data as of April 15, 2019

is director of content for Morningstar.com.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend