While the stock market as a whole has risen smartly this year, with the S&P 500 up 15%, the utility and real estate sectors have suffered.
The S&P 500 Utilities index has slid 15%, and the S&P 500 Real Estate index has lost 8%. That has pushed the sectors to undervalued levels, according to Morningstar.
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Its chief U.S. market strategist Dave Sekera has put together a list of four stocks, two from each sector. They are ones that Morningstar analysts see as substantially undervalued and that sport “solid” dividend yields.
Here are the fab four:
Utility Stocks
American Electric Power AEP
Morningstar moat (durable competitive advantage): narrow. Morningstar fair value estimate: $97. Friday price quote: $77.70. Forward dividend yield: 4.56%.
“The company has been selling non-regulated assets to focus more on the regulated utility portion of their business,” Sekera said.
“AEP has been investing in transmission infrastructure, and that’s one of the more attractive long-term growth opportunities. It’s a way that the utility can benefit from the federal incentives that are out there to improve the efficiency of the U.S. power grid.”
Alliant Energy LNT
Morningstar moat: narrow. Morningstar fair value estimate: $58. Friday price quote: $48.50. Forward dividend yield: 3.72%.
“It’s a high-quality utility operating in constructive regulatory jurisdictions with good management execution,” wrote Morningstar analyst Andrew Bischof.
As for regulation, Alliant’s main two regulatory environments are Iowa and Wisconsin. In Iowa Alliant has received advanced ratemaking on 400 megawatts of solar at an above-average 10.25% allowed return on equity, Bischof said. The outlook is rosy in Wisconsin too, he said.
As for management, the company gets a new chief effective Jan. 1. “We think Lisa Barton is an excellent choice, “ Bischof said.
Real Estate Stocks
Healthpeak Properties PEAK, a portfolio of healthcare-related properties.
Morningstar moat: none. Morningstar fair value estimate: $32.50. Friday price quote: $15.95. Forward dividend yield: 7.63%
“The stock has fallen all the way back to below pre-pandemic levels,” Sekera said. “Healthpeak has a diversified portfolio. It’s mainly medical offices and life science buildings, but a few senior housing and skilled nursing facilities as well.”
For real estate, “this is a defensive play,” Sekera said. “Fundamentally, I don’t think our analysts see anything wrong here. So I assume that the stock has been under pressure from [rising] long-term interest rates.”
Equity Residential EQR, an apartment real estate investment trust REIT
Morningstar moat: none. Morningstar fair value estimate: $87. Friday price quote: $54.45. Forward dividend yield: 4.93%.
This stock too has dropped back to pre-pandemic levels. “They own high-quality apartment-building communities” in major metropolitan areas, Sekera said.
The latest earnings report showed that “occupancy is still very high at 96%, and average rental rates were up 5%,” Sekera said. People are leery of investing in real estate in some of the REITs metropolitan areas, he said. But fundamentals look good.
