3 Undervalued Growth Stocks to Buy | August 7, 2023

[Music] [Music] thank you [Applause] foreign [Music] [Music] [Music] foreign with Morningstar every Monday morning I sit down with Morningstar Research Services chief U.S market strategist Dave Sakara to discuss one thing that's on his radar this week one new piece of Morningstar research and a few stock picks or pants for the week ahead so on your radar this week Dave there are story stocks reporting this week on which our analysts have differentiated opinions from the market let's talk about a few of them the first on the list is international flavors and fragrances now the stocks having a tough 2023 after having a tough 2022 but we think there's opportunity here hey good morning Susan yeah iff has been having a tough year thus far this year now iff is in the specialty chemical sector and as its name implies they make a different type of products for you know food and beverage Healthcare and consumer products and these products are used to be able to create specific types of taste smell or mouth feel you know for Consumer and those type of applications you know based on the specifications that those consumer product companies want you know for those different types of products now it is a little bit more defensive than what you're going to see as compared to most specialty chemical companies but it does still have some cyclicality to its business so earlier this year you know volumes were slightly lower than expected due to macroeconomic weakness plus the company did have some excess inventory that built up over 2022 that it needed to reduce so that did lead management to reduce their guidance earlier this year and the stock sold off you know pretty hard after that now in our financial model we'd actually already Inc Incorporated a little bit of slowness you know earlier this year but we do expect that that slowdown will be contained in the first half of the Year and that things should start to normalize in the second half of the year so the company's stock is rated five stars trades at a 43 discount to our fair value and the company is also rated with a wide economic moat so the next company reporting this week that you're watching is Tyson Foods now Tyson is actually among our analysts list of undervalued stacks they like most for this third quarter but it too is struggled during the past couple of years it has so Tyson is currently rated five stars and it trades at a 34 discount to our fair value now we have seen some very challenging Dynamics you know in the meat markets now similar to iff it is you know a company that does have you know some cyclicality in its business and when I look at our notes Here it really is just that it's been hard to push through a lot of the cost increases as fast as inflation has been ratcheting up and then that's been combined with lower demand so with this inflationary environment we've seen consumers switch to cheaper forms of protein and so between the two you know we've really seen operating margins under a lot of pressure so this one is a bit of a story in that it's a play to normalization over time which is going to be typical of a commodity oriented company got it now Jacob's Solutions is also among our analysts top ideas for the third quarter and at two reports this week now this is perhaps a less familiar name for viewers tell us about it and how our take differs from that of the market yeah so Jacobs is an engineering and construction company it's currently rated four stars and it trades at an 18 discount to our fair value now I think this one actually should have a pretty good growth trajectory over the next couple years you know specifically I think that they're going to be due to benefit from all the infrastructure spending that we're going to see you know coming from the inflation reduction act which is really just starting to roll out and next Celanese also reports this week the Stock's having a pretty good year but we still think it has room to run right yeah we do we still think it's undervalued at this point as it's tied to a couple of different long-term secular Trends so the stock itself trades at a 23 discount to our fair value it is another specialty chemical manufacturer but its products are really tied to electric vehicles so if you remember we've talked about in the past how electric vehicles you know we forecast they're going to be two-thirds of new Global Auto production by 2030 and it takes anywhere between two and a half to three times as many Specialty Chemicals to be able to make one electrified car as compared to an internal combustion engine so I would note for investors that are interested in learning more about the specialty chemical sector I did publish an article on February 24th six cheap stocks to play long-term growth Trends and so in that we just reviewed why we think the specialty chemical companies do stand to benefit from a number of different structural growth themes that we see now we also have some inflation numbers coming out this week Dave what are you expecting and what might the impact be on the market yeah so we have two coming out so first up we have the Consumer Price Index or CPI on Thursday and then on Friday we have the producer price index also known as PPI now of these two I'm probably going to focus more on the CPI number and right now it looks like the market is expecting on a year-over-year basis the headline CPA may actually increase a little bit you know up to 3.3 percent yeah we did note that there were some temporary factors that had brought it down last month but when we look at these and really delve into you know the specifics we do think core inflation should still be study or even better than what we saw last month so as long as the readings are in line with what the market consensus is then I don't really think there's going to be much of a market impact however if you know these were to indicate the inflation you know is starting to head upwards then we could see a market sell-off as people would be concerned about the FED having you know more tight monetary policy yet to come so let's pivot over to some new research from Morningstar and that's your new Stock Market Outlook which published on morningstar.com last week now at the start of 2023 the market looked about 16 percent undervalued according to morningstar's metric metrics so given the market rally that we've experienced this year is the market overvalued now at this point no it's not overvalued yet and I think this would also be a good time to explain you how we look at the market valuation differently than I think what you're going to hear from a lot of other Market strategists so we cover over 700 stocks that trade on U.S exchanges and we take the intrinsic value as determined by all of our Equity analysts on those stocks we put together composite where if every single one of those stocks were to trade to what we think that stock would be worth and then compare that to where the market is actually trading so it's really that Bottoms Up Focus whereas a lot of other strategists you know use a lot of more top-down estimates to come up with where they think the market you know it should be trading so at this point based on that composite we're looking at a market that's trading you know almost exactly in line with those intrinsic valuations on average so then from a practical standpoint Dave when when we have markets such as this one where you know we think it's fairly valued what does that really mean does that mean that you know we don't necessarily think there's any upside left in the market no not at all so when the market or a stock is trading at fair value what that means is that long-term investors should expect to be able to generate you know the company's cost of equity on average over time or for the market you know a blended market cost of equity average so when we talk about the market valuation we talk about what we think it actually is worth today and what's trading at fair value on average we'd expect the market to increase you know based on that cost of equity now we do have different costs of equity that we use in our model that we assign to each individual companies in order to really account for the risk that we see for each one of those individual companies so on average we'll use a nine percent cost of equity for an average risk but that can vary so it goes anywhere from you know seven and a half percent for companies that have below average risk up to 11 for companies with above average risk and for specific companies that are very speculative you know we go all the way up to 13 and a half percent oh God so what would you suggest that investors do in a fairly valued market like the one we're seeing today so I think after the rally we've had thus far this year and seeing how the market has developed I think now is a really good time especially you know here in August as things are starting to quiet down and take a fresh look at your portfolio look at your Holdings look at your positionings and I think what you need to do is go through and really start selling lock in some gains on those positions where stocks have become overvalued and overextended and look to reinvest in those areas that have lagged behind and still remain undervalued so let's talk about some areas where investors might consider taking profits and redeploying cash looking through the lens of style and market cap first yeah so at the beginning of the year based on our evaluations we actually had advocated for a barbell shaped portfolio and so we were looking to be overweight growth overweight value and underweight core now the preponderance of returns thus far this year have really been amongst growth stocks those are up I believe about 27 year-to-date and so in May as the market was moving up closer and closer to fair value you know we moved to a market weight recommendation for growth stocks and then in our third quarter 2023 Outlook as we got at very value and even slightly above for a value for growth stocks we actually moved to an underweight position or underweight recommendation at that point in time so when we look at the valuations now I still think the best positioning for investors is going to be overweight value and an underweight in both core and growth stocks and then looking by market capitalization I would note that mid cap Still Remains undervalued maybe not as undervalued and small cap stocks are still the most undervalued by capitalization so let's look at the market through the lens of sector which sectors look most overvalued today yeah so the technology sector was actually the third most undervalued sector coming into this year but it's now up about 41 year to date and it's actually now the most overvalued sector according to our evaluations trading at about 11 premium to our fair value and then I'd also highlight both energy and Industrials are in that kind of Fairly to maybe even just starting to get overvalued you know kind of area both trading at about a five percent premium to our fair value and now let's flip things Dave which sectors are undervalued so on the undervalued side you know even though it's up 40 year-to-date Communications Still Remains of the most undervalued sector based on our evaluations trading at a 16 discount to our fair value next up is going to be real estate that's the second most undervalued trading at a 13 discount although I still would caution investors you know to maybe steer away from the urban office space I still think there's a lot of risk in that specific sub-sector for real estate and then both basic materials and financials trading at about a seven percent discount so it's time to move on to the picks portion of our program and this week we're focusing on three undervalued growth stocks now as you noted growth stocks have gone from being about 23 undervalued coming into the year to about four percent over value today but there's still some growth opportunities so let's talk about some of them the first growth stock you like this week is doordash why yeah so doordash is currently rated four stars and it trades at a very deep discount of 46 to our Fair Value Estimate and we actually have maintained that Fair Value Estimate at 155 dollars per share after earnings last week now I'll admit yeah I actually haven't followed Dash all that closely myself but it is covered by Ali magarabi and I'd note he is the analyst that also covers you know alphabet and meta which we had talked about last week so in the second quarter note you know he noted that growth in orders and gross value per order both increased you know during the second quarter and you know he also noted the company has retained or actually slightly increased its delivery market share in the US and I think that supports our narrow moat rating which is based on the company's Network effect now I would caution you know the company does still remain unprofitable at this point but Ali did note in his note you know that based on continuing Investments and enhancing the app adding services and being able to attract more customers yeah that in turn is going to be able to allow additional top line growth and free cash flow growth we do expect over the longer term so your next undervalued growth stock pick this week is Uber why Uber yeah so it's a four-star rated stock trades at a 34 discount and again we maintained our 68 Fair Value Estimate after earnings last week and it also has a narrow moat which is based on its uh its Network effect so part of the story here is just that consumer Behavior does continue to keep normalizing we are seeing more and more people go out into public and so Uber's been seeing an increase you know in the number of users the number of trips it's been able to generate increased Revenue per user and per trip and so we just see a lot of you know fundamental you know improvement over time the other thing I'd note here is that Uber did report an operating profit for the first time and we do expect that margins will continue to expand and then your last pick this week Dave is Boston beer why so this one is also a bit of a play on consumer Behavior normalization it's a four-star rated stock trades at about a 29 discount to fair value so there's really two parts to the story here you know so first you know as consumers go out in public what we see is that they tend to choose you know higher branded products as opposed to at home you know when they're choosing you know the cheaper alternatives so as they start buying those branded products you know you do see a margin uplift you know in those but second over the past couple years you know there's been a big shift in the alcoholic beverage industry and that we've seen alcoholic flavored seltzers you know really take off and take some market share from beer so there's a big flurry of competition in the space over the past you know year or two and we're really now starting to see that competition you know stabilizing uh just for note you know Boston beers two main brands in that space are both Twisted Tea and truly so what we saw in the second quarter results is that sales were still slightly moderating but our margins now are improving as the product refreshment and cost saving measures are starting to work well thanks for your time this morning Dave Dave and I will be back next Monday live at 9 A.M Eastern 8 A.M Central in the meantime go ahead and like this video And subscribe to morningstar's channel have a super week [Music] thank you [Music]

Channel: Morningstar, Inc.

Views: 3,895

Keywords: morningstar, investing, stocks, funds, etfs

Id: BYijHQob6QE

Length: 16min 20sec (980 seconds)

Published: Mon Aug 07 2023