The market faces several risks today, including inflation, rising interest rates, and a possible recession. That’s a good time for Australian investors to look beyond their shores for investment ideas– particularly to markets that have sold off harder than the ASX in the year to date.
During uncertain times, investors may want to own companies that offer some sense of certainty in terms of cash flows and company fundamentals. That’s where Morningstar’s Best Companies to Own list comes in. The companies that make up this list—128 in total—have significant competitive advantages, and we think those advantages are stable or growing. We believe the best companies have predictable cash flows and are run by management teams that have a history of making smart capital-allocation decisions.
That said, the best firms aren’t always the best stocks to buy at a given point in time. How much an investor pays to own a company—“best” or otherwise—is important, too. So here we’re focusing on the 10 best companies with the most undervalued stock prices today.
The 10 most undervalued stocks from our Best Companies to Own list as of Aug. 24 were:
Here’s a little bit about why we like each of these companies at these prices. All data is as of Aug. 24, 2022.
Shares of the world’s largest dedicated contract chip manufacturer has struggled this year owing to macroeconomic uncertainty and a sluggish smartphone outlook. We think, however, these headwinds have provided an enticing entry point for stock investors: Taiwan Semiconductor’s stock trades 48% below our fair value estimate of US$166. We foresee high-performance computing demand as the biggest growth driver in the next five years, says Morningstar analyst Phelix Lee—plus industrial and automotive demand remains strong despite a lukewarm consumer outlook.
Although the resurgence in coronavirus cases has put pressure on the Chinese restaurant sector, we think Yum China, the largest restaurant chain in China, is being unduly punished: Yum China stock is 44% undervalued relative to our fair value estimate of US$86. Morningstar senior analyst Ivan Su argues that there’s reason to be confident about restaurants such as Yum China (whose brands include KFC, Pizza Hut, and Taco Bell, among others) that have the scale to be aggressive on pricing in the near term; that provide customers greater access via robust digital ordering, delivery, and drive-thru options; and that boast healthy balance sheets.
The brewer has a vast global scale and regional density. The company has a history of buying brands with promising growth platforms and then expanding distribution while ruthlessly squeezing costs from the businesses, which contributes to the company’s Exemplary Morningstar Capital Allocation Rating. “AB InBev has one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators,” says Morningstar director Philip Gorham. We think the market has underappreciated AB InBev stock for a long while: The stock trades 42% below our fair value estimate of US$90.
Salesforce shares hasn’t been immune to the drubbing that the technology sector has experienced this year. While the enterprise cloud computing solution provider likely faces a dip in revenue growth below 20% at some point in the next few years, we think ongoing margin expansion will provide compound earnings growth of more than 20% for much longer. Salesforce has assembled a front-office empire it can build on for years to come, says Morningstar senior analyst Dan Romanoff. We expect the firm to continue to benefit from cross-selling and upselling, pricing actions, international growth, and continued acquisitions. “We believe Salesforce represents one of the best long-term growth stories in software,” Romanoff concludes. Salesforce shares are 31% undervalued relative to our US$305 fair value estimate.
Growth in Comcast’s U.S. cable business has slowed, and we expect it to continue to slow as more customers access fiber and wireless network alternatives. The falloff in Comcast shares suggests years of steep customer losses, which we don’t think is likely, says Morningstar director of media and telecom research Mike Hodel. Comcast stock trades about 38% below our fair value estimate of US$60 today. The second quarter was a mixed bag, with zero net broadband customer additions. We think investors should focus instead on the company’s ability to generate strong cash flow and maintain a solid balance sheet despite lingering headwinds.
The price of GSK shares declined recently over concerns arising from possible cancerous side-effects from blockbuster heartburn medication Zantac. We think the company’s Wide, stable Economic Moat is intact and that the market has over-reacted to this news. Not only does GSK have a strong, multi-class therapeutic portfolio today, it has a strong pipeline, as well. At an August 24 closing price of US$53.33, we think shares are 38% undervalued.
Another victim of 2022′s tech-stock selloff, Guidewire stock is undervalued by about 38%. Guidewire provides software solutions for property and casualty insurers. Guidewire’s modern software platform has disrupted a sleepy industry that had been underserved by legacy software vendors, according to Morningstar senior equity analyst Romanoff. As the industry can no longer wait nor afford to maintain legacy systems, we see a long runway for additional growth, he adds. We’ve therefore awarded Guidewire a Morningstar Moat Trend Rating of Positive.
Zimmer Biomet Holdings
Zimmer Biomet is the leader in large human joint reconstruction, and we expect demand for large-joint replacement to be solid, thanks to favorable demographics that include aging baby boomers and rising obesity, Morningstar senior equity analyst Debbie Wang observes. The company has cultivated close relationships with orthopedic surgeons and therefore enjoys vendor loyalty, which has helped the company dig a Wide Morningstar Economic Moat Rating. Zimmer plans to accelerate growth through innovative products and improved execution, adds Wang. Zimmer Biomet stock trades 37% below our fair value of US$175.
One of the leading credit bureaus in the United States, Equifax faces strong headwinds today as mortgage market weakness—and a subsequent decline in mortgage credit inquires—takes a toll. We nevertheless think the market is being overly harsh: Equifax stock trades 36% below our $320 fair value estimate. In fact, we think Equifax’s Workforce Solutions segment is differentiated and growing at a healthy clip, says Morningstar analyst Rajiv Bhatia, and we think the segment’s fundamentals are strong. It is now Equifax’s largest segment.
Though we lowered our fair value estimate on this provider of cloud-based software services to US$675 from US$700 on July 27, we still think shares are 32% undervalued. The company’s SaaS platform has grown strongly yet organically in recent years. One amazing factoid: its average annual contract value has doubled over the last three years, according to senior equity analyst Dan Romanoff.
The Best Companies to Own in 2022
You can review all of the companies on our Best Companies to Own list and dig into our methodology, which includes definitions for the key Morningstar metrics included in this article. Those with specific interests can drill down with our Best International Companies to Own, Best Sustainable Companies to Own, or Best Innovative Companies to Own lists, too.
This article was adapted from this version by Susan Dziubinski on Morningstar.com.