If you’re looking for stocks, it always make sense to go for high-quality companies that are undervalued.
Morningstar cites three such candidates, owned by gold-rated FPA Crescent fund (FPACX). Gold is the firm’s top rating. The stocks also earn wide moat designations from Morningstar, which means its analysts think the companies will maintain competitive advantages for 20 years or more.
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The stocks also are undervalued as measured by Morningstar’s fair value estimates.
FPA Crescent co-manager Steve Romick says it’s not about choosing growth versus value stocks. Rather, value investing is about buying a quality stock when there’s a margin of safety and having the patience to hold on as your thesis about the company plays out.
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Comcast
Morningstar puts fair value for Comcast (CMCSA) at $60. It closed Tuesday at $39.62
“U.S. broadband customer growth was again anemic during the first quarter, but Comcast's pricing and cost discipline delivered solid financial results,” Morningstar analyst Michael Hodel wrote in a commentary.
Looking at the company broadly, “Comcast’s core cable business enjoys significant competitive advantages but will likely see growth slow as competition for incremental customers heats up,” he said.
“NBCUniversal isn’t as well positioned but holds unique assets, including core content franchises and theme parks, that should help ease the transition away from the traditional television business.”
Bottom line: “we expect Comcast will deliver modest growth with strong cash flow for the foreseeable future,” Hodel said.
Alphabet
Morningstar puts fair value for Alphabet (GOOGL) at $154. It closed Tuesday at $107.35.
“We were impressed by Google Search advertising revenue growth [in the first quarter] and continuing strength in the cloud business, which is making headway toward profitability, likely next year” wrote Morningstar analyst Ali Mogharabi.
He also likes Alphabet’s profit-margin expansion and the latest authorized share buyback.
On the downside, “economic uncertainty pushed network ad revenue lower,” Mogharabi said. Also, there’s increasing competition in artificial intelligence.
Still “we believe Alphabet has the necessary technology and talent to successfully battle AI competitors,” Mogharabi said.
“Overall, we believe Alphabet is well positioned to benefit from an improving economic climate, which will accelerate ad spending.”
Meta Platforms
Morningstar puts fair value for Meta Platforms (META) at $278. It closed Tuesday at $233.37.
“Meta’s first-quarter results confirmed our views on Reels [Meta’s TikTok competitor] monetization, ad conversion improvement, margin potential and an unharmed network effect,” Mogharabi wrote.
“We have increased our revenue projections and continue to expect margin expansion beginning in 2024, pushing our fair value estimate up … from $260 a share.”
Further, “we commend the firm for shifting its short- and medium-term focus mostly toward increasing efficiency within its family of apps segment,” Mogharabi said.
“That will help increase the capital available to continue share repurchases and reinvest in enhancing artificial intelligence-powered family of apps features, while also investing in the metaverse, the firm’s long-term focus.”
The author of this story owns all three stocks – Comcast, Alphabet and Meta.
