6 Cheap Stocks That Crushed Q2 Earnings Estimates: Morningstar

Forty-six percent of the 854 U.S.-based stocks covered by Morningstar analysts are trading below their fair-value estimates. Paired with second-quarter earnings, those undervalued stocks offer investors an opportunity to screen for cheap names that turned in better-than-expected earnings performance, Jakir Hossain, associate markets data journalist, wrote in a recent blog post.

Hossain noted that 665 U.S.-listed companies in the Morningstar universe had reported second-quarter earnings as of Aug. 16. A third of those beat earnings estimates by 10% or more, the fewest in four quarters. In addition, only 14% beat their EPS estimates by 5% to 10%, the fewest since the second quarter of 2021.

At the same time, 17% of companies reported missing estimates by 10% or more, up from an average of 12% in the previous four earnings periods.

According to Hossain, although Morningstar stock analysts closely watch earnings, they focus on long-term results and valuations. They usually do not change the long-term assumptions behind their assessment of a stock’s fair value because of one quarter, unless a company reports new material information that affects the assumptions analysts based their opinion on.

That said, a look at quarterly earnings in the context of valuation can help investors identify opportunities. Analysts screened for stocks that beat second-quarter expectations by 5% or more but remained undervalued. They filtered for five-star stocks — the highest Morningstar rating — in order to highlight the most undervalued opportunities.

See the gallery for the six stocks — less than 1% of the 854 screened — that made the cut.