- Morningstar analysts recently compiled a list of more than two-dozen stocks across each S&P 500 sector that they believe are trading below their true value.
- They listed two or three of their "best ideas" for each sector. Google parent Alphabet, energy giant Schlumberger, and healthcare company Pfizer were among those included.
- More broadly, Morningstar thiink the wider S&P 500 is undervalued after one of its worst first quarters ever.
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For Morningstar, the recent stock market rout has yielded big buying opportunities for investors in every sector.
"We think stocks overall are undervalued," the research firm wrote in a recent note clients, pointing to the brutal first quarter showing for the vast majority of major indexes worldwide.
With the S&P 500 turning in a 20% first-quarter decline and continuing to swing wildly in the second quarter, analysts have identified undervalued names, or stocks they believe are trading below their true value.
"Of the roughly 800 North American stocks we cover, a hefty 67% have an undervalued rating of 4 or 5 stars, whereas three months ago, only about 20% were undervalued," Jeffrey Stafford, Morningstar's director of North American equity research, said in a recent report.
One unique aspect of the coronavirus sell-off is that each corner of the market has been hit hard. Strategists interviewed by Business Insider recently attributed that to intense selling with little regard for underlying fundamentals.
It's under those conditions that Morningstar pinpointed 32 stock picks across each sector. The common thread is that each company was selected based on how undervalued it looks to the firm's analysts.
But before we get to the master stock list, here are the wider investment theses the analysts laid out for each industry, which serve to contextualize the picks. Some are stock-specific, while some are wider observations for the whole sector.
1. Materials
"We see little demand impact across the agriculture sector, as our base case for 2020 assumes farmers will still plant crops globally," said analyst Kris Inton. "As such, we continue to expect a significant rebound in US acres planted following 2019's lowest total plantings in over a decade due to flooding."
2. Communication services
Director Mike Hodel said Alphabet, the Google parent company, looks particularly attractive within the communication services sector. That's even as advertising spending will take a hit, he added.
"The stock now looks more attractive to us than it has since the short-lived market downturn in late 2018," he said.
3. Consumer discretionary
"We expect travel demand to wane in the short term due to expanding travel restrictions, but when considering the impact of SARS (2003), we believe any impact will reverse over a longer horizon," said Erin Lash, a director at the firm, adding that travel demand will rebound during the second half of 2020.
4. Consumer staples
Food producers should benefited from shifting consumer behavior during the coronavirus pandemic, Lash said, but said she does not expect those gains to continue longer-term.
5. Energy
"In the near term, investors have every reason to be worried," director David Meats said. "We project 2020 oil demand will fall 2.8 million barrels per day (2.8%), the largest single-year drop in nearly 40 years."
6. Financial services
"The recent underperformance of the financial sector is understandable, given that two of its primary earnings drivers, interest rates and asset prices, have been in freefall over the past several weeks because of the coronavirus outbreak," Michael Wong, a director, said.
7. Healthcare
"We believe concerns about a global recession due to the coronavirus disruption are weighing on returns, but the defensive nature of healthcare is supporting returns on a relative basis," Damien Conover, a director at Morningstar, said.
8. Industrials
"We think defense prime contractors are a smart play for investors concerned with unfavorable cyclical turns," director Brian Bernard said, adding the median stock in his coverage universe was trading around 20% below fair value.
9. Real estate
"As a result of the recent equity sell-off, dividend yields have dramatically increased," said analyst Kevin Brown. "We currently believe that most REITs will continue to pay their dividend, making these high yields very attractive to investors."
10. Technology
Morningstar director Brian Colello said each of the stocks he has selected — Intel, Palo Alto Networks, and VMWare — generates "revenue on a subscription basis with little risk of cancellations, even as work shifts to homes and away from the office."
11. Utilities
"Now utilities are back where they belong, on defense," said strategist Travis Miller, adding the sector is trading at its cheapest valuation since 2008.
Presented below — and grouped by sector — are undervalued stocks these analysts have recommended, which have all been labeled "best ideas."
MATERIALS STOCK #1: Corteva (CTVA)
Stock: Corteva
Sector: Materials
Market cap: $20 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
MATERIALS STOCK #2: Ecolab (ECL)
Stock: Ecolab
Sector: Materials
Market cap: $52 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
MATERIALS STOCK #3: Vulcan Materials (VMC)
Stock: Vulcan Materials
Sector: Materials
Market cap: $16 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
COMMUNICATION SERVICES STOCK #1: Alphabet (GOOGL)
Stock: Alphabet
Sector: Communication services
Market cap: $777 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
COMMUNICATION SERVICES STOCK #2: Comcast (CMCSA)
Stock: Comcast
Sector: Communication services
Market cap: $171 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
COMMUNICATION SERVICES STOCK #3: Disney (DIS)
Stock: Disney
Sector: Communication services
Market cap: $192 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
CONSUMER DISCRETIONARY STOCK #1: Carnival (CCL)
Stock: Carnival
Sector: Consumer discretionary
Market cap: $8 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
CONSUMER DISCRETIONARY STOCK #2: Hanesbrands (HBI)
Stock: Hanesbrands
Sector: Consumer discretionary
Market cap: $3 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
CONSUMER STAPLES STOCK #1: Anheuser-Busch Inbev (BUD)
Stock: Anheuser-Busch Inbev
Sector: Consumer staples
Market cap: $82 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
CONSUMER STAPLES STOCK #2: Constellation Brands (STZ)
Stock: Constellation Brands
Sector: Consumer staples
Market cap: $30 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
CONSUMER STAPLES STOCK #3: U.S. Foods Holding (USFD)
Stock: U.S. Foods Holding
Sector: Consumer staples
Market cap: $4 billion
Economic moat: None
Source: Morningstar, Markets Insider
ENERGY STOCK #1: Enbridge (ENB)
Stock: Enbridge
Sector: Energy
Market cap: $62 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
ENERGY STOCK #2: Enterprise Products Partners (EPD)
Stock: Enterprise Products Partners
Sector: Energy
Market cap: $39 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
ENERGY STOCK #3: Schlumberger (SLB)
Stock: Schlumberger
Sector: Energy
Market cap: $24 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
FINANCIAL STOCK #1: American Express (AXP)
Stock: American Express
Sector: Financials
Market cap: $77 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
FINANCIAL STOCK #2: Berkshire Hathaway (BRK.B)
Stock: Berkshire Hathaway
Sector: Financials
Market cap: $474 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
FINANCIAL STOCK #3: Broadridge Financial Solutions (BR)
Stock: Broadridge Financial Solutions
Sector: Financials
Market cap: $12 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
HEALTHCARE STOCK #1: CVS Health (CVS)
Stock: CVS Health
Sector: Healthcare
Market cap: $78 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
HEALTHCARE STOCK #2: Pfizer (PFE)
Stock: Pfizer
Sector: Healthcare
Market cap: $198 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
HEALTHCARE STOCK #3: Zimmer Biomet Holdings (ZBH)
Stock: Zimmer Biomet Holdings
Sector: Healthcare
Market cap: $23 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
INDUSTRIAL STOCK #1: 3M (MMM)
Stock: 3M
Sector: Industrials
Market cap: $85 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
INDUSTRIAL STOCK #2: Deere (DE)
Stock: Deere
Sector: Industrials
Market cap: $47 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
INDUSTRIAL STOCK #3: Lockheed Martin (LMT)
Stock: Lockheed Martin
Sector: Industrials
Market cap: $105 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
REAL ESTATE STOCK #1: Pebblebrook Hotel Trust (PEB)
Stock: Pebblebrook Hotel Trust
Sector: Real estate
Market cap: $2 billion
Economic moat: None
Source: Morningstar, Markets Insider
REAL ESTATE STOCK #2: Simon Property Group (SPG)
Stock: Simon Property Group
Sector: Real estate
Market cap: $22 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
REAL ESTATE STOCK #3: Ventas (VTR)
Stock: Ventas
Sector: Real estate
Market cap: $13 billion
Economic moat: None
Source: Morningstar, Markets Insider
TECHNOLOGY STOCK #1: Intel (INTC)
Stock: Intel
Sector: Technology
Market cap: $250 billion
Economic moat: Wide
Source: Morningstar, Markets Insider
TECHNOLOGY STOCK #2: Palo Alto Networks (PANW)
Stock: Palo Alto Networks
Sector: Technology
Market cap: $18 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
TECHNOLOGY STOCK #3: VMWare (VMW)
Stock: VMWare
Sector: Technology
Market cap: $14 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
UTILITY STOCK #1: AES Corporation (AES)
Stock: AES Corporation
Sector: Utilities
Market cap: $10 billion
Economic moat: None
Source: Morningstar, Markets Insider
UTILITY STOCK #2: Duke Energy (DUK)
Stock: Duke Energy
Sector: Utilities
Market cap: $64 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
UTILITY STOCK #3: Edison International (EIX)
Stock: Edison International
Sector: Utilities
Market cap: $22 billion
Economic moat: Narrow
Source: Morningstar, Markets Insider
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