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Are Australian stocks undervalued?

Lewis Jackson  |  23 Jun 2022Text size  Decrease  Increase  |  
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A week on from the worst selloff since the pandemic, is value finally on offer? Ask three analysts, get three answers.

Boosters like Cathie Woods see “deep value” in the technology wipe-out. Noble prize winner Robert Shiller’s favoured metric suggest more pain. Warren Buffett’s valuation standard also looks ominous.

But one Morningstar metric is showing the most value in almost six years excluding the brief pandemic meltdown.

The number of ASX companies under Morningstar coverage trading in four- or five-star range—where analysts believe shares are cheap—is quadruple those in the one- and two-star range.

The Morningstar star rating for stocks accounts for how sure analysts are about fair value estimates. A simple comparison of share price to fair value does not. In effect, the star rating includes an additional buffer for investors to reflect how uncertain profit forecasts are.

Take oil and gas company Beach Energy (BPT). Oil prices are fickle. Much of the company’s value lies in reserves still underground and drilling is risky and expensive. When future profits can be so volatile, analysts slap on a high uncertainty rating. By comparison, grocery shopping tends to be stable and predictable. Market leader Woolworths (WOW) is one of only four companies with a low uncertainty rating.

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Can undervalued companies fall further? Absolutely. Bear markets bring indiscriminate selling. Good and bad companies alike are dumped. All the same, long-term valuation focussed investors may want to take a second look.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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