With the S&P 500 already gaining 12% so far this year, be careful about overpaying for stocks.
In light of that, you may want to have a look at the 10 most undervalued stocks on Morningstar’s Best Companies to Own list (it has 117 stocks in total.) Morningstar measures valuations based on its analysts’ fair value estimates.
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The Morningstar list includes companies to which Morningstar assigns a moat, meaning they have durable competitive advantages.
“We believe the best companies have predictable cash flows and are run by management teams that have a history of making smart capital-allocation decisions,” writes Morningstar investment specialist Susan Dziubinski.
“But the best firms aren’t always the best stocks to buy now. How much an investor pays to own a company -- best or otherwise -- is important too.”
So, here’s Morningstar’s Top 10 list, starting with the most undervalued stock as of May 30. The firm has assigned all 10 companies wide moats, meaning it thinks their competitive advantages will last at least 20 years.
Food, Finance and Drugs
1. International Flavors & Fragrances (IFF), the largest global specialty-ingredient maker. Morningstar fair value estimate: $140. Friday’s closing price: $80.05.
“While the near term will see profits decline, we continue to see a solid long-term outlook,” Morningstar analyst Seth Goldstein wrote in a commentary.
“IFF's turnaround is just beginning, as the company is poised to grow profits at a high-single-digit rate from 2024-26. Volumes should recover, and management is implementing cost reductions to drive margin expansion.” Furthermore, “IFF holds an enviable portfolio focused on value-added products,” he said.
2. U.S. Bancorp (USB), the big regional bank. Morningstar fair value estimate: $53. Friday’s closing price: $31.74.
The bank reported “average” results for the first quarter, wrote Morningstar analyst Eric Compton. “We think these results support our thesis that the largest banks will not face dramatic disruption to their deposit bases” amid the industry’s turmoil, he said.
“While some incremental pressure on revenue is likely, it will be manageable.” To be sure, he did lower his fair value from $58 May 10.
3. Anheuser-Busch InBev (BUD), the world’s largest beer brewer. Morningstar fair value estimate: $90. Friday’s closing price: $54.85.
4. GSK PLC (GSK), the large U.K. drug company. Morningstar fair value estimate $54. Friday’s closing price: $34.11.
5. Comcast (CMCSA), the media/telecommunications/entertainment stalwart. Morningstar fair value estimate: $60. Friday’s closing price: $39.19.
Add Some Tech and Medical Equipment
6. Yum China (YUMC), the largest restaurant chain in China, including KFC and Pizza Hut. Morningstar fair value estimate: $84. Friday’s closing price: $58.57.
7. Roche Holding (RHHBY) , the big Swiss drug company. Morningstar fair value estimate: $57. Friday’s closing price: $40.39.
8. Wells Fargo (WFC), the giant bank. Morningstar fair value estimate: $58. Friday’s closing price: $41.24.
9. Zimmer Biomet (ZBH), a medical device/equipment maker. Morningstar fair value estimate: $175. Friday’s closing price: $129.81.
10. Taiwan Semiconductor Manufacturing (TSM), the chip titan. Morningstar fair value estimate: $139. Friday’s closing price: $98.94.
The author of this story owns shares of International Flavors & Fragrances and U.S. Bancorp.
