33 Undervalued Stocks for Q3: Morningstar

U.S. stocks officially entered bear market territory and finished the second quarter down nearly 17%, as measured by the Morningstar US Market Index, Susan Dziubinski, director of content at Morningstar.com, wrote in a recent blog post.

“Heading into the third quarter, stocks look downright cheap according to our metrics: The median stock in Morningstar’s North American coverage universe traded at a 17% discount to our fair value estimate.”

According to Morningstar chief U.S. market strategist Dave Sekera, writing in his latest stock market outlook, “At current valuations, we think the market is overly pessimistic regarding the economic outlook.” 

Morningstar defines undervalued stocks as those that are trading below analysts’ calculated fair value estimate, adjusted for what they call uncertainty — both of which are wrapped into the Morningstar Rating for stocks. 

Stocks rated 4 and 5 stars are undervalued; those rated 3 stars are fairly valued, and stocks rated 1 or 2 stars are overvalued. 

Dziubinski wrote that stocks look undervalued almost across the board viewed through several different lenses.

By investment style, small-value stocks are the most undervalued style, trading 40% below Morningstar’s fair value estimate, while large-cap core stocks are only about 8% undervalued.

By sector, communication services and consumer cyclicals are the two most undervalued, trading 37% and 25% below fair values. Defensive stocks in the utilities, health care and consumer defensive sectors, meanwhile, are about fairly valued, Morningstar reports.

Stocks are also undervalued by Morningstar Economic Moat Rating, which is a sign of a company’s competitive advantages. Wide-moat stocks are undervalued by a larger percentage, 22%, than either narrow-moat or no-moat stocks.

See the gallery for 33 stocks Morningstar analysts have found to be undervalued going into the third quarter, by sector.