Just because the S&P 500 index has jumped 8% so far this year doesn’t mean that all stocks are overvalued.
Indeed, research firm Morningstar cites three stocks that have soared in 2023 but are still undervalued compared to its estimates of their fair value. It anticipates further gains for these stocks.
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Scotts Miracle-Gro, The Lawncare Company
(SMG)
The stock has surged 63% year to date. Morningstar analyst Seth Goldstein puts fair value at $115, compared to a recent quote of $79.40. He assigns the company a narrow moat (competitive advantage).
“Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market,” Goldstein wrote in a commentary.
“The company’s U.S. consumer segment, which consists of lawn and gardening products, generated 75% of total revenue in fiscal 2022,” he said. “Scotts has generated healthy margins on its products through effective branding.”
Housing industry growth will determine future demand for gardening products, Goldstein said.
“The company’s Hawthorne segment, which includes indoor gardening, hydroponics, and lighting equipment, contributed a little under 20% of revenue in fiscal 2022,” he said. “Its growth is closely tied to the legalization of cannabis.”
Spotify, The Streaming Music Service
(SPOT)
The stock has climbed 59% so far this year. Morningstar analyst Ali Mogharabi puts fair value at $170, compared to a recent quote of $126.10. He gives the company no moat.
“Swedish-based Spotify is the world’s leading music streaming service provider,” he wrote in a commentary. “We foresee the fast-growing digital streaming space as becoming the primary distribution platform of choice within the ever-changing music industry.”
Further, “we believe Spotify can benefit from various network effects that will help the firm increase its users and amass valuable intangible assets associated with user data and listening preferences,” Mogharabi said.
“However, it faces intense competition and has a mostly variable cost structure that may limit Spotify’s future operating leverage and profitability.”
SoFi Technologies, An Online Bank
(SOFI)
The stock has ascended 46% year to date. Morningstar analyst Michael Miller puts fair value at $14.50, compared to a recent quote of $6.80. He assigns the company no moat.
“SoFi targets young, high-income individuals who may be underserved by traditional full-service banks,” he wrote in a commentary. “The company engages with its clients exclusively through its mobile app and website.”
Also, “unlike existing digital banks, which generally have limited product offerings, SoFi offers a full suite of financial services and products -- everything from student loans to estate planning,” Miller says.
“The intent is to allow customers to structure the entirety of their finances around SoFi, and the company’s reward structures are designed to encourage its clients to do so. By acting as a one-stop shop, SoFi intends to create powerful cross-selling advantages.”
