While the S&P 500 has lost 16% so far in 2022, some stocks have bucked the trend.
And some of these winners are still significantly undervalued, Morningstar says, creating buying opportunities.
The research firm cited three examples. These are companies to which it assigns a wide moat (competitive advantage).
And they are stocks that have gained at least 10% so far this year and are substantially undervalued, according to Morningstar analysts’ metrics.
Here are the three companies.
Yum China (YUMC): This is the company that operates Yum’s brands in China, including KFC and Taco Bell.
Morningstar analyst Ivan Su puts fair value for the stock at $84. It recently traded at $52, indicating 62% potential upside.
“Yum China's third-quarter results reinforce our view that the firm will come out of the coronavirus pandemic as a more resilient and profitable business,” he wrote in a commentary.
“Sporadic lockdowns and uneven spending patterns over the past year pushed Yum China to accelerate cost cuts, resulting in a quarter of record-breaking profitability at KFC.”
China's zero-tolerance covid policy is the biggest obstacle for restaurants there. But “the size of Yum's off-premise business (over 60% of revenue) positions the firm to outperform its peers,” he said.
“Investors are underestimating the firm's long-term growth prospects and potential for further margin expansion.”
Kellogg (K): This is the cereal giant. Morningstar analyst Erin Lash puts fair value for the stock at $82, 14% above recently trades at $72.
“We perceive the high-single-digit rout in wide-moat Kellogg’s share price as unjustified following fair third-quarter results, which included more than 13% organic growth,” she wrote in a commentary.
“While these marks were driven entirely by higher prices (up nearly 16%), the mere 2% volume retreat strikes us as quite subdued.”
Further, “this a testament to the strategic course (boosting investments in brands and capabilities) Kellogg embarked on a number of years ago,” Lash said.
“Even as inflationary headwinds and crimped supply chains persist, … we don’t surmise that price hikes are Kellogg’s only mechanism through which to lessen the profit hit.” Cost savings and price-per-pack management will help too, she said.
AstraZeneca (AZN): This the pharmaceutical mainstay. Morningstar analyst Damien Conover puts fair value for the stock at $74. It recently traded at $66, indicating 12% upside.
“AstraZeneca has built its leading presence in the pharma and biotech industry on patent-protected drugs and a developing pipeline,” he wrote in a commentary. “The replenishment of new drugs is setting up industry-leading growth.”
As for that pipeline, “the company is developing several key products that hold blockbuster potential,” Conover said.
“In particular, the company's recently launched cancer drugs Tagrisso and Imfinzi are well-positioned based on leading efficacy in hard-to-treat cancers. These drugs should also carry strong pricing power, driving the potential to expand Astra's margins.”
In addition to pricing power, the company should gain operating leverage as its new drugs reach critical mass, Conover said.
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