Morningstar unveils 10 cheap stocks with big moats
In a perfect world, all the stocks you buy would be high-quality companies (those with strong fundamentals) selling at bargain prices.
To give you an idea of how difficult that is, iconic investor Warren Buffett is satisfied buying strong companies at fair prices, rather than holding out for bargain prices. And even the Oracle of Omaha isn’t successful all the time.
Nonetheless, Morningstar is helping investors find cheap quality stocks by compiling a list of the most undervalued stocks of businesses protected by wide moats.
Morningstar defines a stock as undervalued based on how current share prices stack up to their analysts' fair value price targets. A wide moat designation means Morningstar analysts see the company as having competitive advantages that will last at least 20 years.
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A pick six of stocks
Here are six of the best-known companies on the research firm’s list, starting with the most undervalued as of March 20.
1. Etsy (ETSY) , the online arts and crafts market. Morningstar fair value estimate: $140. Thursday price: $69.
“Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products,” writes Morningstar analyst Sean Dunlop.
“The firm’s marketplace properties target non-commoditized inventories; generate commissions on third-party, peer-to-peer sales; and strive to create a treasure-hunt experience around a unique, customizable, and consequently less price-elastic product suite.”
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2. Pfizer (PFE) , the pharmaceutical giant. Morningstar fair value estimate: $42. Thursday price: $27.85.
“Pfizer's foundation remains solid, based on strong cash flows generated from a basket of diverse drugs,” writes Morningstar analyst Damien Conover. “The company's large size confers significant competitive advantages in developing new drugs.”
In addition, “after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer and immunology,” he said.
3. Estee Lauder (EL) , the cosmetics stalwart. Morningstar fair value estimate: $210. Thursday price: $153.95.
“As a leading provider of premium beauty products, Estee Lauder has reinforced its competitive standing with category-leading brands in skin care, cosmetics, and fragrances,” writes Morningstar analyst Dan Su.
Also, “it retains preferred vendor status across brick-and-mortar and digital channels.” And the company’s scale gives it cost advantages, he said.
In addition, “Estee is poised to benefit from premiumization trends, as consumers upgrade for better-quality ingredients and service.”
Food, media, and athleisure stocks
4. Campbell Soup (CPB) . Morningstar fair value estimate: $61. Thursday price: $44.50.
“Campbell’s strategic focus has set it on a sound course, leveraging technology, data insights, and artificial intelligence to bring consumer-valued products to market in a timely fashion,” writes Morningstar analyst Erin Lash.
It’s also “reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network.”
Lash thinks Campbell “will remain resolute in supporting its brands” with research, development, and marketing.
Fund manager buys and sells:
5. Comcast (CMCSA) , the media/entertainment colossus. Morningstar fair value estimate: $60. Thursday price: $43.30.
“Comcast’s core cable business enjoys significant competitive advantages but has seen growth slow, as fixed-wireless offerings have provided a viable option for a subset of customers,” writes Morningstar analyst Michael Hodel.
“NBCUniversal isn’t as well positioned but holds unique assets, including core content franchises and theme parks…. NBCU’s assets will play a significant role in the media landscape of the future.”
6. Nike (NKE) , the athletic apparel/shoe behemoth. Morningstar fair value estimate: $129. Thursday price: $93.90.
“Nike is the leader of the athletic apparel market, and we believe it will overcome current challenges, such as soft demand for sportswear in key markets,” writes Morningstar analyst David Swartz.
“Nike, the largest athletic footwear brand in all major categories and in all major markets, dominates categories like running and basketball with popular shoe styles. It has proven it can maintain share and pricing.”
The other companies on Morningstar’s list are:
Specialty ingredients company International Flavors & Fragrances (IFF) ,
Biotechnology company Biogen (BIIB) ,
Bond trading platform MarketAxess (MKTX) , and
Medical device company Zimmer Biomet (ZBH) .
The author owns shares of Pfizer, Comcast, Nike and International Flavors & Fragrances.
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