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The Street

Dan Weil

Morningstar's most undervalued stocks among best to own

Morningstar Estee Lauder GSK Stock Market Yum China

The stock market’s rally this year (the S&P 500 has climbed 17%) has some investors thinking that equities are overvalued.

But some stocks may still be a good buy. Morningstar has a list of the best stocks to own now.

The companies on this list “have significant competitive advantages,” the research firm says.

“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.”

Stock valuations are a key factor, too, Morningstar says. “The best firms aren’t always the best stocks to buy,” it says. “How much an investor pays to own a company — best or otherwise — is important, too.”

So Morningstar has put together a roster of the 10 most undervalued stocks on its best-to-own list. It measures undervaluation according to its fair-value estimates.

All these stocks have wide-moat ratings from Morningstar. That means it sees them with competitive advantages that will last at least 20 years.

Here are the winners, starting with the most undervalued as of Aug. 29.

Undervalued: Restaurants, cosmetics and beer

1. Yum China, China’s biggest restaurant chain, including KFC

(YUMC) -)

Morningstar fair value estimate: $84. Monday price quote: $53.25.

“We believe Yum China's current share price overlooks two things,” wrote Morningstar analyst Ivan Su.

“One: the business's opportunities for unit expansion in China's growing fast-food industry. ... And two, further margin expansion will be realized by operating leverage and ongoing digital and automation investments.”

2. Estee Lauder, the cosmetics company

(EL) -)

Morningstar fair value estimate: $249. Monday price quote: $161.60.

“As a leading provider of premium beauty products, Estee Lauder has fortified its competitive standing with category-leading brands in skin care, cosmetics, and fragrances,” wrote Morningstar analyst Dan Su.

It also has “retained a preferred vendor status across brick-and-mortar and digital channels. ... We see Estee as poised to benefit from premiumization trends.”

3. Anheuser-Busch InBev, the brewing giant

(BUD) -)

Morningstar fair value estimate: $90. Monday price quote: $55.70.

Morningstar analyst Philip Gorham took two “major positives” from the company’s first-half earnings update.

“First, management's comments that Bud Light's share hasn’t worsened since April, when a boycott of the brand began, suggests further downside risk from the marketing mishap is probably limited,” he said.

“Second, this was another indication that margins have bottomed in Latin America, a key driver of ABI's economic profit.”