Morningstar Unveils Top-Tier Bargain Stocks to Own

As the S&P 500 continues to achieve record highs, including its most recent peak on July 16, investors face the critical challenge of navigating market highs with prudence. While such peaks can signal robust economic and market conditions, they also present the risk of overvalued stocks. In this environment, identifying high-quality companies available at bargain prices is crucial for maintaining a balanced investment strategy.

Morningstar, a leading investment research firm renowned for its rigorous analytical approach, has provided a valuable resource for investors seeking undervalued stocks. Morningstar’s list includes 20 stocks that the firm believes offer substantial potential for growth based on their wide-moat ratings and strong capital allocation practices.

Morningstar’s Value Investing Philosophy

Morningstar’s investment philosophy centers around the concept of acquiring shares of high-quality businesses at prices below their intrinsic value. According to Susan Dziubinski, an investment specialist at Morningstar, “Our approach to stock investing is to buy shares of great businesses at a discount to their worth.” Morningstar identifies “great companies” as those with durable competitive advantages, allowing them to sustain high returns on capital over an extended period.

The firm assesses a company’s fair value by estimating its underlying cash flows and comparing this value to the current trading price. This method focuses on a company’s fundamental value, providing a clearer picture of whether a stock is undervalued relative to its intrinsic worth.

Top Undervalued Stocks from Morningstar

Here are five well-known stocks from Morningstar’s list of undervalued companies, each receiving a “wide-moat” rating, indicating strong competitive advantages expected to last at least two decades. These companies have also received exemplary capital allocation ratings, further underscoring their investment appeal.

1. Anheuser-Busch InBev (BUD)

• Morningstar Fair Value Estimate: $90
• July 31 Close: $59.50 Despite recent difficulties, including the underperformance of Bud Light due to controversial marketing campaigns, Morningstar analyst Ioannis Pontikis remains optimistic about AB InBev. The company’s vast global presence and strong regional market dominance provide significant cost advantages. AB InBev’s scale and operational efficiency give it considerable leverage and procurement power, maintaining its position as a formidable player in the global beverage industry.

1. Bristol-Myers Squibb (BMY)

• Morningstar Fair Value Estimate: $63
• July 31 Close: $47.55 Morningstar analyst Damien Conover highlights that the market may be undervaluing Bristol-Myers Squibb, especially given the potential of its new product lineup. Recent innovations, including drugs like Zeposia for immunology, Breyanzi for cancer, and Camzyos for rare diseases, are showing increasing promise. Additionally, the anticipated approval of Bristol’s schizophrenia drug KarXT could further strengthen the company’s competitive position and financial outlook.

1. Nike (NKE)

• Morningstar Fair Value Estimate: $124
• July 31 Close: $74.85 Nike’s stock has faced a significant decline of 31% year-to-date due to various challenges, such as a slowdown in innovation and soft demand in key markets. Nonetheless, Morningstar analyst David Swartz remains confident in Nike’s long-term prospects. Despite intense competition, Nike’s historical ability to maintain market share and pricing power positions it well for a potential recovery. Swartz’s analysis suggests that Nike’s leadership in the athletic apparel sector will help it rebound from current difficulties.

1. Starbucks (SBUX)

• Morningstar Fair Value Estimate: $96
• July 31 Close: $77.95 Starbucks has experienced an 18% decline in its stock price this year amid weaker sales. Morningstar analyst Sean Dunlop provides a mixed outlook, noting improvements in the company’s loyalty program and digital sales. However, Dunlop suggests that Starbucks may continue to face challenges until a broader recovery in consumer spending materializes, which he anticipates will occur in the latter half of 2025.

1. Taiwan Semiconductor Manufacturing (TSM)

• Morningstar Fair Value Estimate: $213
• July 31 Close: $165.80 Taiwan Semiconductor Manufacturing, the leading contract chip maker, has seen its stock decline by 13% since July 10. Morningstar analyst Phelix Lee views this decline as an opportunity for investors. Lee’s analysis highlights that the pullback represents a favorable entry point for those looking to gain exposure to artificial intelligence and semiconductor growth. Lee’s revised fair value estimate reflects stronger expectations for pricing, AI demand, and potential revenue guidance revisions.

Conclusion

Morningstar’s curated list of undervalued stocks offers investors an opportunity to acquire high-quality companies at discounted prices. By focusing on companies with strong competitive advantages and sound capital allocation practices, investors can potentially enhance their portfolio returns while mitigating the risks associated with market peaks. Evaluating these stocks in the context of their fair value estimates and recent performance provides a strategic approach to investing in a high-priced market environment.