Morningstar recently released our “Equity Market Outlook Q1 2026”. The report highlights our top picks across our ASX coverage. Aussie share prices have fallen back to reality in the past quarter with blue chips dragging on the ASX200 index. The equal weighted Price to Fair Value (P/FV) metric has fallen back to even. This means that on average, current share prices across our coverage are reflecting their fair value estimates.

The good news for investors is that there remains significant pockets of value. At the end of November, 36% of stocks in our coverage were 4 or 5 star rated indicating these shares are trading at a discount to fair value. This is above the 10-year trailing average of 25% suggesting ample opportunities remaining in market. Here’s everything you need to know.

Price to Fair Value Across Coverage

Value pockets in our coverage

The cheapest sectors in terms of price to fair value are energy, healthcare and consumer defensive. Diminishing confidence surrounding global oil supply & demand is the primary driver in underperformance in energy. Healthcare on average looks fairly priced however key players such as CSL, Ramsay Health Care and Sonic Healthcare remain materially undervalued.

As for defensives, valuations have been trading at discounts to fair value on the back of sluggish sales growth. There has also been an increasing disconnect in price to fair value in the technology sector following the recent selloff in AI tech shares in the US.

On the flip side utilities, financial services, industrials and materials remain fairly priced on average. Looking at market trends throughout this year it starts to make a lot of sense. The banks are still trading at eye watering multiples despite sluggish earnings growth. Material stocks have outperformed on the back of stronger demand and optimism over improved economic activity. Industrials are coming off recent highs but still remain expensive on average.

Star rating distribution by sector

With a good grasp on sector valuations across our coverage,let’stake a deeper look at three top picks which span across three different sectors.

Auckland Airport (ASX:AIA)

  • Fair Value Estimate: $8.10 (10% discount at 8 January)
  • Rating: ★★★★
  • Moat: Wide

Auckland Airport is the largest airport in New Zealand. The airport enjoys the benefits of being the only gateway to and from New Zealand for international travel. These near monopolistic conditions give the airport a wide moat, given the lighter regulatory environment and lesser likelihood of any direct competition in the foreseeable future.

The company makes money in two core segments: Aeronautical and Non-Aeronautical. The aeronautical business is regulated and includes revenues from landing fees and per passenger fees with the airlines. The non-aeronautical business makes money through retail stores in the airport (primarily through duty-free). While revenue is split close to 50/50 between these two segments, the retail side is more profitable. This segment benefits most from international travel and increased passenger volume.

The airport is investing NZD$7 billion in capital expenditure over the next decade or so. The sizeable investment aims to facilitate greater capacity and modernise airfield infrastructure. While heavy capex may stretch the balance sheet, the airport is expected to continue to drive profits through increasing regulated passenger fees. Our analyst believes Auckland Airport is only set to benefit from rising incomes and population growth in New Zealand’s largest city. AIA has a current yield of 1.71% (no franking) and is dual listed on the ASX & NZX.

Fineos (ASX:FCL)

  • Fair Value Estimate: $4.00 (25% discount at 8 January)
  • Rating: ★★★★
  • Moat: Wide

Fineos is a global market leader in providing critical software to life, accident and health insurers to run their day-to-day operations. They operate heavily in the US with 7 out of the 10 largest employee benefit insurers using their platform. This dominance in the US drives 80% of their revenues while the remainder is spread across Europe and Asia Pacific (including Australia).

The cloud platform streamlines workflows, saves costs and helps the insurer win new business. Around half of insurers globally still use in house legacy systems which are clunky and have high operating costs. Due to cost pressures, regulatory tightening and increasing competition switching to a cloud-based platform is an attractive alternative for large multinational insurers and presents an industry tail wind for Fineos.

Fineos boast a wide moat which is derived from the high switching costs for their customers. They have developed high quality infrastructure that large insurers rely on for mission critical activities. Our analysts believe the associated costs to switch to another competitor far outweigh any benefits that competitors currently provide. This is a key reason why Fineos has such a sticky customer base with an implied lifespan of 10-20 years.

The business is currently transitioning existing customers onto their SaaS platform (previously developed on site products). The SaaS model makes it easier for Fineos to rollout new features at lower costs. The caveat to the SaaS model which I discussed in my previous article is that short term profitability is impacted as revenues are spread across the lifetime of the subscription instead of upfront.

Nevertheless, our analyst forecasts Fineos to turn net profit within the next year and to grow NPAT to EUR 15 million by 2029. Fineos is based in Dublin, Ireland but its only listing is on the ASX as a CDI.

Endeavour (ASX:EDV)

  • Fair Value Estimate: $6.10 (39% discount at 8 January)
  • Rating: ★★★★★
  • Moat: Wide

Endeavour is Australia’s largest liquor retailer which own household names such as Dan Murphy’s and BWS. They also operate a portfolio of over 300 pubs, clubs and hotels across Australia. This includes a sizeable 12,000 gaming machines across their locations. The liquor business has highly defensive earnings. The second arm of the business has more uncertainty surrounding earnings given the tightening of state gambling legislation.

Endeavour’s wide moat is mainly derived from the liquor business. Endeavour dominate the liquor scene in Australia, owning close to half of the $20 billion total addressable market. Competitors in this market include Coles (ie. Liquorland) who have a 17% market share and Metcash who technically supply independent stores who have a collective 26% market share. Endeavour’s market dominance is driven by its scale which allows for wider profitability margins in comparison to peers.

Our analyst believes the market underappreciates Endeavour’s defensive long term earnings outlook. Lower liquor sales growth from weaker consumer confidence is expected to turnaround by 2027 as economic conditions improve. Over the long run, liquor demand is defensive underpinned by inflation, population growth and a structural trend toward premiumisation.

Overall, Endeavour is materially undervalued compared to fair value given the high visibility of earnings for its moated liquor business. The current yield is 5.5% full franked.

Bottom Line

You may have picked up by now that the common theme across all three stocks picked today are: wide moats & material discount to fair value. A wide moat is a good indicator for investors that the company has a sizeable competitive advantage in its field. Furthermore, the wide moat rating indicates a sustained competitive advantage over peers which is expected to generate excess returns of capital over the next 20 years. While our price to fair value across our coverage remains fairly priced, the shares discussed today are good examples of discounted, wide moated shares currently trading on the ASX.

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