Morningstar analysts recommend these undervalued stocks.
If markets were truly efficient, Berkshire Hathaway (ticker: BRK.A, BRK.B) CEO Warren Buffett has mused, he’d be out of a job. Far from perfectly efficient, markets often seem to forget undervalued companies, which can boast historically stable cash flows, scandal-free operations and strong brand recognition — but not command a premium price. Post-pandemic, prices for many great stocks remain depressed from unexpected losses and setbacks, offering investors access to a lower entry point and opportunities for outsized gains. For those looking to trade like Buffett and buy the dip, here are nine undervalued stocks to buy, according to Morningstar.
Stellantis NV (STLA)
Stellantis NV formed on Jan. 16, 2021 following the merger of French automaker PSA Group and Italian automaker Fiat Chrysler. The newly formed company is focused on building a new era in sustainable mobility, targeting 40% electrical vehicle sales by 2025, and includes brands such as Alfa Romeo, Chrysler, Dodge, Fiat, Jeep, Maserati, Peugeot and Ram. Mergers enhance economies of scale — Stellantis would have been the fourth-largest global automaker in 2020 — and management targets synergies of around 5 billion euros, according to Morningstar analyst Richard Hilgert. Although the stock has fallen 11% in the last month, it closed trading on July 20 at $17.95, much less than Morningstar’s fair value estimate of $33. That’s a steep discount to fair value, easily qualifying it as one of the more undervalued stocks in the market.
Implied upside: 84%
Hanesbrands Inc. (HBI)
Hanesbrands is the market leader in basic innerwear, a clothing category that includes underwear, undershirt, bras and socks. According to a 2017 Milward Brown market report, brand recognition is the leading consideration for innerwear customers, and Hanes claimed a 39% share of the North American men’s underwear market in 2021, more than the combined shares of Fruit of the Loom and Jockey. Competitors, such as L Brands Inc. (LB), PVH Corp. (PVH) and VF Corp. (VFC) — all more expensive stocks — trade at much higher multiples. With significant supply chain advantages over its competitors — more than 70% are its products are manufactured in dedicated plants — Hanes looks like an undervalued stock to buy, judging by Morningstar analyst David Swartz’s fair value estimate. Morningstar has a $25 fair value estimate for HBI; the stock closed at $17.79 on July 20.
Implied upside: 41%
Delta Air Lines Inc. (DAL)
Delta Air Lines is one of the nation’s largest airlines, attracting high-spending travelers through its many premium offerings and credit card partnerships, creating an added cushion for both revenue and margins. Months into the pandemic recovery, the airline has seen significant improvements, with passenger revenue increasing 94.3% from the previous quarter and 93% of corporate accounts indicating they intend to increase travel volumes in the third quarter. Expect Delta Air Lines, with its premium offerings, to capitalize on corporate travel and return to 2019 capacity by 2023, says Morningstar analyst Burkett Huey. Morningstar has a “buy” rating and $52.50 fair value estimate for DAL stock, a $11.84 premium to its share price at the close of July 20.
Implied upside: 29%
Anheuser-Busch InBev (BUD)
Anheuser-Busch InBev is the world’s largest brewer and the parent company of Budweiser, Beck’s and Corona. CEO Carlos Brito left the position at the beginning of July after 16 years at the helm and was replaced by former North American president Michel Doukeris. For years, Anheuser-Busch has made a business of acquiring brands with promising growth platforms, pumping distribution and ruthlessly cutting costs as the beverage industry rushed to consolidate. First-quarter earnings in 2021 showed volume grew 13.3%, a sign that recovery was moving along faster than expected, and the focus now shifts to keeping margins steady or growing as ingredient costs rise, says Morningstar analyst Philip Gorham. Morningstar has a $90 fair value estimate for BUD, and the stock closed at $66.93 on July 20, earning it a spot among the top undervalued stocks to buy.
Implied upside: 34%
Compass Minerals International Inc. (CMP)
Compass Minerals International, based in Overland Park, Kansas, is the largest salt producer in North America and the U.K., as well as a leading producer of minerals used in fertilizing, deicing and dedusting. In mid-July, the company’s stock soared 13% after it announced finding lithium in leftover sulfate of potash brine, anticipating it will produce between 20,000 and 25,000 metric tons. The firm’s rock salt mine in Ontario and brine operations at the Great Salt Lake in Utah offer significant natural cost-cutting advantages, such as access to deep water ports and control of one of only three naturally occurring sources for sulfate of potash, a premium fertilizer. These competitive advantages, along with an exemplary capital structure, should allow Compass’ stock price room to rise, says Morningstar analyst Seth Goldstein. Morningstar has a $88 fair value estimate for CMP, and the stock closed at $69.18 on July 20.
Implied upside: 27%
The third-largest oil company in the U.S. traces its roots back to Continental Oil and Transportation Co., founded in 1875, and Phillips Petroleum Co., founded in 1917, which merged under the name ConocoPhillips in 2002. The energy company’s 10-year plan for restrained investment, steady growth, improving returns and, importantly, returning cash to shareholders makes ConocoPhillips a compelling play in the energy sector, says Morningstar analyst Allen Good. ConocoPhillips has committed to spending an average of $7 billion annually on capital expenditures over the next decade, helping grow production by 3% annually through 2031, according to Good. Morningstar has a $69 fair value estimate for COP stock, and it closed at $54.47 on July 20.
Implied upside: 27%
Kellogg Co. (K)
For over 100 years, Kellogg has lived up to its mission statement, “nourishing families so they can flourish and thrive,” by producing, marketing and distributing consumer favorite snacks and cereals such as Frosted Flakes, Eggo waffles, Pop-Tarts and Froot Loops, just to name a few. Strong brand recognition has allowed this company to maintain a spot on the shelves in the ultra-competitive retail space, and a new emphasis on warehouse distribution as opposed to store distribution has increased performance worldwide, including nine consecutive quarters of organic sales growth in Europe. Revenues are expected to grow 1.6% in 2022 and 2.2% in 2023, with earnings before interest, taxes, and depreciation (EBITDA) margins expected to rise a full percentage point, according to Morningstar analyst Erin Lash. Morningstar has an $83 fair value estimate for K stock, and the stock closed at $64.40 on July 20.
Implied upside: 29%
Wells Fargo & Co. (WFC)
Wells Fargo is one of the big four U.S. megabanks. In recent years, it has underperformed due to scandals involving fraudulent customer accounts, aggressive marketing and other issues, but it remains the third-largest deposit gatherer in the U.S. Analyst Eric Compton says Wells Fargo has one of the best branch networks in the U.S., excels in the middle-market commercial space and has a strong advisory network, giving it the right pieces to establish a solid franchise. Recently released second-quarter earnings per share (EPS) of $1.38 handily exceeded the FactSet consensus EPS estimate of 98 cents, and with a price-to-book ratio of 1.08, well below the 1.56 average in the financial sector, WFC stock currently has earned its spot among undervalued stocks. Morningstar has a “buy” rating and $55 fair value estimate for WFC stock, which closed at $44.84 on July 20.
Implied upside: 23%
Kraft Heinz Co. (KHC)
In 2015, Kraft Food Groups Inc. merged with H.J. Heinz Company to form Kraft Heinz Co. and brought some of the world’s most iconic food products, including Oscar Mayer, Jell-O and Velveeta, all under one umbrella. It has since become the third-largest food and beverage producer in North America and has built a strong brand name leading to repeat purchases. A newly revised strategic playbook, which focuses on reinvesting earnings in brand spending and enhancing capabilities rather than inflating profit, targets a 30% increase in marketing investments between 2020 and 2024, says Morningstar analyst Erin Lash. With strong brand recognition and a commitment to reinvestment, KHC’s current stock price presents a low entry point for a company with upside potential. Morningstar has a $50 fair value estimate for KHC stock, and it closed at $39.40 on July 20.
Implied upside: 27%
Nine undervalued stocks to buy with big upside:
— Stellantis NV (STLA)
— Hanesbrands Inc. (HBI)
— Delta Air Lines Inc. (DAL)
— Anheuser-Busch InBev (BUD)
— Compass Minerals International Inc. (CMP)
— ConocoPhillips (COP)
— Kellogg Co. (K)
— Wells Fargo & Co. (WFC)
— Kraft Heinz Co. (KHC)
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