With so much turmoil coursing through the equity market in recent months, it’s difficult to figure out how to choose stocks for those looking to buy.
Dave Sekera, senior U.S. market strategist for Morningstar, discerns four important themes prevalent in financial markets and selects undervalued stocks you might purchase to take advantage of these themes.
1. “The carnage that we’ve seen across regional bank stocks, [with two bank failures], has weighed upon the entire financial sector,” he wrote in a commentary.
“As such, a number of non-bank financial stocks have been caught in this downdraft that we think have fallen to attractive levels.”
One that Sekera likes is Discover Financial Services (DFS). Morningstar assigns it a narrow moat (competitive advantage) and puts fair value for the stock at $146. It recently traded at $98.
“Although we do expect the economy to soften later this year, we have already incorporated an increase in charge-offs in our assumptions,” Sekera said. “The firm is in strong financial position with good reserves.”
Consumer Behavior Normalizes
2. “Over the near term, we expect to continue seeing consumer behavior normalize, as the pandemic fades,” Sekera said. And Uber Technologies (UBER) is one stock levered to that normalization.
Morningstar gives Uber a narrow moat and puts fair value at $68. It recently traded at $31.
“Consumers are returning to restaurants, concerts, and other public events,” Sekera said. “And we forecast business travel will pick up this year and next.” These two trends point to a continued increase in the number of rides and the number of rides per user, he said.
3. Then there are long-term trends playing out over the next decade. One is a transition to electric vehicles, Sekera said. “We expect that two-thirds of new auto production will be electrified by 2030,” he said.
“Yet we also forecast there will not be enough lithium [a key part of EV batteries] to satisfy demand, keeping lithium prices elevated.”
That leads Sekera to Albemarle (ALB), one of the world’s biggest lithium producers. Morningstar assigns it a narrow moat and puts fair value at $350. It recently traded at $224.
“Albemarle [is] one of the lowest-cost lithium hydroxide producers,” wrote Morningstar analyst Seth Goldstein.
Sekera Cites Defensive Stocks
4. Investors concerned about the stock market’s volatility might consider defensive stocks. Sekera suggests looking at cereal titan Kellogg (K).
Morningstar gives it a wide moat and puts fair value at $84. It recently traded at $66.50.
“We think its position as a leading packaged food manufacturer and its arsenal of resources have afforded Kellogg the ability to maintain valuable shelf-space for its offerings,” said Morningstar analyst Erin Lash.
To be sure, “while we've long held that Kellogg's strategic playbook … is on point, we question the rationale underpinning its decision to spin off its North American cereal and plant-based arms, leaving it with [just] its global snacking brands,” she said.
