After a volatile March, the stock market is climbing again in the second quarter of 2023, but the Federal Reserve is still raising interest rates in its ongoing battle against inflation. Investors have grown increasingly optimistic that the Fed can navigate a soft landing for the U.S. economy, but the economic outlook for 2023 remains uncertain.
In these unpredictable times, investors can mitigate risk by using the power of diversification. They can also maximize long-term return potential by targeting undervalued stocks.
Morningstar tracks the relative valuation of stocks compared to their current market price. At the end of the first quarter of 2023, Morningstar analysts estimated that the median North American stock was trading at a 10% discount to its fair value estimate.
Here’s one undervalued stock to buy from each of the 11 market sectors, according to Morningstar:
|Discount from “fair value”
|ServiceNow Inc. (ticker: NOW)
|Carnival Corp. (CCL)
|The Walt Disney Co. (DIS)
|Moderna Inc. (MRNA)
|Albertsons Companies (ACI)
|Berkshire Hathaway Inc. Class B (BRK.B)
|Masco Corp. (MAS)
|TC Energy Corp. (TRP)
|FMC Corp. (FMC)
|AvalonBay Communities Inc. (AVB)
|NiSource Inc. (NI)
Information Technology: ServiceNow Inc. (NOW)
ServiceNow Inc. is a Santa Clara, California-based information technology company that provides a cloud platform that helps companies digitize their business. It has a 98% renewal rate, as of the end of 2022, which speaks to the success of what Morningstar senior equity analyst Dan Romanoff calls a “classic land-and-expand strategy.”
NOW started by building a best-of-breed SaaS solution to establish itself in IT service management, then used the same product design features to expand into human resources, customer service, service delivery, finance and operations.
“Recently, ServiceNow has been offering higher pricing tiers with an increasing array of features, along with industry-specific vertical solutions, which have higher average selling prices, or ASPs, and help drive revenue growth,” Romanoff writes.
Morningstar’s fair value estimate for NOW is $600, which is a 21% discount from its closing price of $473.31 on April 21.
Consumer Discretionary: Carnival Corp. (CCL)
As one of the largest cruise ship companies in the U.S., Carnival is a familiar name, but it hasn’t always been associated with positive news, especially since the COVID-19 pandemic. CCL reported net income losses of more than $3.4 billion in both 2020 and 2021, and $2.8 billion in net income losses in 2022.
Unfortunately, the company appears to be “sailing into another year of losses,” according to Morningstar senior equity analyst Jaime M. Katz, but she reports that it is also “on trajectory to restore profitability in 2024.”
Carnival finally achieved a full return to guest cruise operations in 2022. This coupled with cruise tourism expected to exceed 2019 levels in 2023, according to forecasts by Cruise Lines International Association, and things could surely be looking up for CCL stock.
Morningstar’s fair value estimate for CCL is $22, which is a 57% discount from its closing price of $9.38 on April 21. It is also one of only two five-star rated stocks by Morningstar on this list.
Communication Services: The Walt Disney Co. (DIS)
Anyone born before the 2000s can attest to how fast the media industry evolves. Between the early 1990s and today, home movies have evolved from VHS tapes to DVDs and now online streaming. For media companies like Disney, this can pose a challenge: Either transform to keep pace with the times or risk becoming obsolete. According to Morningstar senior equity analyst Neil Macker, DIS falls firmly in the former category.
“The firm’s direct-to-consumer efforts, Disney+, Hotstar, Hulu and ESPN+ are taking over as the drivers of long-term growth as the firm transitions to a streaming future,” he writes. “We expect that Disney+ will continue to leverage this content to create a large, valuable subscriber base.”
Morningstar’s fair value estimate for DIS is $155, which is a 36% discount from its closing price of $99.57 on April 21.
Health Care: Moderna Inc. (MRNA)
Moderna became a near-household name as one of the COVID-19 mRNA vaccine pioneers. But the company was working on mRNA therapeutics and vaccines a decade before COVID-19.
Its most recent Vaccine Day on April 11, when company management and key opinion leaders gave a live webcast about the company’s vaccines and vaccine development, gave Morningstar sector strategist Karen Andersen confidence in the company’s future outside of COVID-19.
“Moderna’s vaccine day provided more support for our belief in its ability to expand vaccine revenue beyond COVID-19, given the firm’s rapid pace of development and flexible manufacturing,” she writes.
She says Morningstar is bullish on MRNA’s pipeline of next-generation respiratory vaccines and combination vaccines, as well as advancing programs in oncology and other infectious and rare diseases.
Morningstar’s fair value estimate for MRNA is $266, which is a 47% discount from its closing price of $140.85 on April 21.
Consumer Staples: Albertsons Companies (ACI)
Albertsons Companies is one of the largest food and drug retailers in the U.S. It has 2,271 retail stores in 34 states and the District of Columbia. Depending on where you live, it may go by any one of 22 different names, including Safeway, Vons, ACME, United Supermarket, Andronico’s and, of course, Albertsons. The company may become even larger if regulators approve a merger with Kroger.
While Morningstar Equity Analyst Zain Akbari is skeptical the merger will go through, he’s still optimistic of Albertsons’ strength on its own.
“We are encouraged that the company continues to progress in improving efficiency and bolstering its omnichannel capabilities,” he writes. “Our long-term standalone forecast for Albertsons still calls for low-single-digit top-line growth and mid-single-digit adjusted EBITDA margins over the next decade.”
Morningstar’s fair value estimate for ACI is $29, which is a 28% discount from its closing price of $20.76 on April 21.
Financials: Berkshire Hathaway Inc. Class B (BRK.B)
If you could pick any person’s brain, whose would it be? For many investors, the answer is likely Warren Buffett. Even the Biden administration turns to Buffett for guidance in stressful times, such as the recent banking crisis.
In the absence of access to the Oracle of Omaha’s brain itself, you could do worse than to settle for stock in the company for which he is CEO and that serves as his own investment vehicle.
“We continue to believe that Berkshire, owing to its diversification and its lower overall risk profile, offers one of the better risk-adjusted return profiles in the financial-services sector – and remains a generally solid candidate for downside protection during market selloffs,” writes Morningstar sector strategist Greggory Warren.
BRK.B is the lower-priced share class of the stock, trading at about $324 per share compared to the class A version which is pushing $500,000 per share.
Morningstar’s fair value estimate for BRK.B is $370, which is a 12% discount from its closing price of $324.33 on April 21.
Industrials: Masco Corp. (MAS)
Masco is a Michigan-based home improvement and building products manufacturer. This gave the company a leg up during the pandemic when home improvement projects became a Band-Aid for social distancing boredom, but Morningstar sector director Brian Bernard says the company’s success story is “as much of a self-help story as a story of improving end markets.”
After refreshing its senior executive management about a decade ago, Masco has been working to build a better business model. While repair and remodeling spending surged during the pandemic, Bernard doesn’t foresee a downturn in home improvement projects. This is a good sign for MAS, which derives 89% of its sales from repair and remodeling spending.
Morningstar’s fair value estimate for MAS is $71, which is a 28% discount from its closing price of $50.79 on April 21.
Energy: TC Energy Corp. (TRP)
TRP is a natural gas, oil and power generation firm located in both Canada and the U.S. With oil demand expected to outpace supply in the latter half of 2023, TRP could be poised for a financial tailwind from higher oil prices, according to Morningstar sector strategist Stephen Ellis. He predicts prices could reach $100 per barrel in 2023.
“We believe that TC Energy’s broad network of crude and natural gas pipeline assets and geographic diversification will serve up ample opportunities for pipeline expansions in growing regions,” Ellis writes.
However, while the near-term outlook may be strong for oil producers, the long-term remains uncertain as economies try to combat climate change. To this end, Ellis says he has faith TC Energy will “naturally undertake more aggressive investment going forward,” though to date its more conservative approach has caused it to lag its peers.
Morningstar’s fair value estimate for TRP is $47, which is a 12% discount from its closing price of $41.21 on April 21.
Materials: FMC Corp. (FMC)
FMC Corp produces crop chemicals, such as insecticides, herbicides and fungicides, across the globe. Its broad geographic standpoint, which includes Asia and Africa, is part of the reason Morningstar strategist Seth Goldstein is optimistic about the future of FMC stock.
“We expect FMC to benefit from emerging-market food demand growth, led by India and sub-Saharan Africa,” Goldstein writes.
While he expects a deceleration of profit growth in the near term due to higher raw material costs, he expects FMC to “increase revenue at a pace slightly higher than the industry” in the long run.
Morningstar’s fair value estimate for FMC is $140, which is a 12% discount from its closing price of $123.22 on April 21.
Real Estate: AvalonBay Communities Inc. (AVB)
AVB is an equity real estate investment trust, or REIT, meaning it owns or operates income-producing properties. In the case of AVB, these are apartment homes throughout the Northeast, mid-Atlantic, Pacific Northwest and Northern and Southern California with newer expansions into Colorado, Southeast Florida, North Carolina and Texas.
“These markets exhibit traits that create strong demand for apartments like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing and attractive urban centers that draw younger people,” writes Morningstar senior analyst Kevin Brown.
While high inflation has driven rents and by extension AVB’s revenues higher, Brown mention’s he’s “cautious” about AVB’s growth prospects given the influx of new supply in many of its markets.
“While we expect revenue growth to decelerate in 2023 as inflation growth is brought under control and also expect a period of higher than normal expense growth, the company’s funds from operations per share are already above prepandemic levels and we expect continued same-store growth to push FFO even higher,” Brown says.
Morningstar’s fair value estimate for AVB is $241, which is a 28% discount from its closing price of $173.33 on April 21. It also gets five stars from Morningstar.
Utilities: NiSource Inc. (NI)
NiSource is one of the nation’s largest natural gas distributors, but it recognizes the future is sustainable energy.
“NiSource continues to transition away from its roots as a natural gas distribution and midstream company,” Morningstar strategist Travis Miller writes. “An increasing focus on electric infrastructure and renewable energy will be a key growth driver in the coming years, creating a more even mix of earnings from its natural gas and electric businesses.”
Morningstar’s fair value estimate for NI is $32, which is an 11% discount from its closing price of $28.64 on April 21. NI is one of the most undervalued utilities companies covered by Morningstar.