30 undervalued US stocks – part 2

In part one we explored undervalued stocks across the basic materials, communications services and energy sectors that feature among our analysts' best ideas.

Now we delve into several more.

Financial Services

In the financial-services sector, we're seeing the most value among banks, with about half of the names we cover trading in 4- and 5-star range, notes sector director Michael Wong in his review. "Compared with the previous quarter, we no longer see favourable risk-adjusted returns for asset managers," adds Wong. "There's 10 per cent upside to the median price/fair value estimate of our asset management coverage after our coverage appreciated 11 per cent in the previous three months."

Top picks in the financial services sector

Source: Morningstar Data as of April 15, 2019

Healthcare

The healthcare sector was fairly valued at the end of the first quarter, trading just 1 per cent below our fair value estimate. Not surprisingly, there are few buys: Only 4 per cent of our healthcare coverage universe is rated 5 stars, notes sector director Damien Conover in his update. Most of the 4- and 5-star names are drug manufacturers or healthcare providers. "In drug manufacturing, we believe the market is still ascribing too much valuation pressure on the industry due to potential negative drug pricing regulations," adds Conover.

Top picks in the healthcare sector

Source: Morningstar Data as of April 15, 2019

Industrials

The industrials sector was trading at a slight 3 per cent discount to our fair value estimate as of quarter-end, up from a 15 per cent discount at the end of 2018, notes sector director Keith Schoonmaker in his quarterly review. The team is seeing upside in industrial distribution and logistics. "We expect distributors will leverage their selling, general, and administrative expenses to drive year-over-year operating margin improvements," he says. Moreover, most truckers are unlikely to match their rate gains in 2018, which has opened up opportunity as market valuations have corrected.

Top picks in the industrial sector

Source: Morningstar Data as of April 15, 2019

Real Estate

Real estate is among the most fairly valued sectors today, with the average stock in our coverage universe trading at a 4 per cent premium to our fair value estimate, says analyst Kevin Brown in his update. "Considering most of the names fall in the 3-star range, we see only a few attractively priced real estate companies and none trading at 5 stars," he notes.

Top picks in the real estate sector

Source: Morningstar Data as of April 15, 2019

Technology

Tech stocks snapped back in the first quarter after a dismal stretch in late 2018. As a result, the average tech stock in our coverage universe trades at just a 2 per cent discount to fair value, says sector director Brian Colello in his latest update. "Despite the recent rally in tech and in semiconductors specifically, we still think semis are the most undervalued subsector in technology, as about 30 per cent of our coverage is 4-star-rated or higher and the median chip stock is about 4 per cent below our fair value estimate," he notes. The team also thinks online media is an attractive segment.

Top picks in the technology sector

Source: Morningstar Data as of April 15, 2019

Utilities

Trading at a 10 per cent premium to our fair value estimate, the utilities sector is overpriced. Moreover, dividend yields remain near decade lows, points out sector strategist Travis Miller in his quarterly update. "For income investors, utilities' dividends have rarely looked so attractive," argues Miller. "U.S. utilities' 3.4 per cent average yield is 90 basis points above the 10-year U.S. Treasury yield as of late March, a reliable buy signal." Further, we think these dividends are well-covered and set to grow more than 5 per cent annually in the next three to five years, with some boasting dividend growth of 10 per cent or more.

Top picks in the utilities sector

Source: Morningstar Data as of April 15, 2019