Contrary to intutition, bear market rallies may make it tougher for investors to do their jobs. It’s hard to determine which stocks are overvalued and which still have room to rise. Morningstar shared 14 stocks that are still cheap, despite beating the market. Loading Something is loading.
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Stocks have been on an upward tear since mid-October, right in time to usher in the holiday season with good cheer.
But some analysts have warned that any celebrations may be premature.
“We don’t typically get markets reaching trough until interest rates start to come down, and we’re still a little way away from that,” said Goldman Sachs’ Chief Equities Strategist Peter Oppenheimer in a recent interview with Bloomberg.
Mike Wilson, the chief investment officer of Morgan Stanley, echoed Oppenheimer’s statement in a CNBC interview last week. “The final move of the bear market probably comes next year in the first quarter, when the earnings finally catch up to where we think they’re going to be next year,” he told the outlet.
Besides the threat of impending market volatility, contrary to intuition a bear market rally like the current one may actually make it harder for investors to determine which stocks are worth buying, since some stocks caught up in the run upwards risk rallying far above their fair value.
To put it another way, investors may find it increasingly difficult to discern between the stocks that still have room to rally, versus those that have shot up beyond reason and may face a correction in the near future.
14 undervalued stocks to buyTo find the stocks that have rallied recently yet still have room to rise, Morningstar analysts screened for undervalued firms from a basket of names that are up 10% or more as of November 17. Then, they whittled that list down to the stocks that Morningstar analysts considered undervalued.
Out of the 14 total names remaining, four of these stocks were considered to have the largest safety margins, or a clear and durable competitive advantage over their peers.
Fast-food chain Yum China (YUMC), for example, commands a robust enough supply chain and brand name to become the prime beneficiary in China’s growing fast-food industry, said Senior Equity Analyst Ivan Su, who added that he was also optimistic about the company’s top-line drivers.
Despite facing fierce competition in the fields of gene editing and RNA-based therapies, Morningstar Strategist Karen Andersen believes that biotechnology firm Ionis Pharmaceuticals (IONS) has the ability to emerge victorious.
“Ionis has built a massive pipeline of promising new drugs that are rapidly moving toward the market, securing a narrow moat,” she said. In her base case for the stock she predicts that by 2030 the company’s revenue will swell to $3.1 billion, while its operating margins will approach 50%.
Analysts also noted that Kellogg (K) holds a significant advantage due to its focus on new product launches and strong relationship with consumers. Consumer Sector Director of Equity Research Erin Lash was particularly optimistic about the firm’s ability to generate returns above its cost of capital over the next two decades, even in a more bearish environment.
“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,” she explained.
Finally, Morningstar analysts highlighted AstraZeneca (AZN), noting its strong pipeline and its development of drugs that carry high pricing power.
“AstraZeneca has built its leading presence in the pharma and biotech industry on patent-protected drugs and a developing pipeline that add up to a wide moat. The replenishment of new drugs is setting up industry-leading growth,” wrote Damien Conover, director of equity strategy for the healthcare sector.
The full list of Morningstar’s 14 undervalued bear market stars is below, along with each firm’s ticker, sector, bear market return, and price discount.