- “Since 2010, stocks have rarely been this undervalued,” said Morningstar’s Dave Sekera.
- He believes recessionary fears are overblown, and urged investors to buy stocks at current prices.
- Morningstar shared the 33 top undervalued, high-quality companies to buy now.
Since deteriorating market sentiment officially sent the S&P 500 spiralling into bear market territory earlier in June, stocks still haven’t made a comeback. In fact, with the next inflation print coming up on Wednesday, combined with the second-quarter earnings season kicking off later this week, investors are more on edge than ever.
But Dave Sekera, Morningstar’s chief US market strategist, says that the fear currently priced into the market may be overblown.
“At current valuations, we think the market is overly pessimistic regarding the economic outlook,” he said in a market update from early July. “The current level of undervaluation is the greatest discount to our long-term, intrinsic valuations since the emergence of the pandemic in March 2020 and the growth scare that sent stocks lower in December 2018.”
Sekera also believes that recessionary fears are unduly heightened, and advised investors to take advantage of this rare opportunity to add stocks into their portfolios.
“We think the market is overreacting, as we do not project a recession occurring in the near term,” he said. “Based on our view that the U.S. equity market is undervalued, we think that now is not the time to be reducing equity exposures but to be adding judiciously — especially in companies with wide economic moats — based on your investment plan and goals.”
The 33 best undervalued stocks to buy
According to Sekera, communication services and consumer cyclicals are currently the two cheapest sectors, trading 37% and 25% below Morningstar’s fair value estimates, respectively. Most defensive stocks are fairly valued, except for utilities, which Sekera said skewed slightly overvalued. And since the recent pullback in oil prices, he now believes that energy names are back to trading at fair valuations.
Small-cap stocks are also trading around 40% below their fair valuations, versus their larger peers, which are trading around 8% cheaper, added Sekera. Likewise, companies with wide economic moats — a more sustainable economic advantage — were trading at a 22% discount and cheaper than their peers with narrow or no moats.
For the third quarter of 2022, Morningstar analysts shared their 33 top stock picks that are both undervalued and high quality. The full group is listed below in alphabetical order, along with each company’s ticker, sector, and market capitalization.
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