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These Stocks Are Currently Under- and Overvalued

Despite market weakness, Morningstar Stock Research highlights several stocks that remain overvalued, plus a few that offer upside potential

Holly Cook 17 October, 2011 | 10:56AM

We've highlighted below those London Stock Exchange-listed stocks under our coverage that are rated 1-star, 2-star and 5-star. The Morningstar Rating for stocks is calculated by comparing a stock's current market price with Morningstar's estimate of the stock's fair value. If a stock has a high star rating, that means we think the shares have good upside potential and that prospective investors might want to keep them on their radar; a low star rating denotes the opposite. Find out more here.

1-Star Stocks
Shire
Shares in Shire (SHP) have recovered much of the early-August decline but are still 0.6% weaker over the past three months as a whole. Despite this, Morningstar's analysis denotes that the shares remain overvalued and the stock therefore carries a 1-star rating. Read Morningstar's Research Report including fair value estimate here.

2-Star Stocks
ARM Holdings
Shares in ARM (ARM) also suffered at the hands of the August sell-off but have since more than recovered those losses and as at October 14 were trading 4.4% higher than their three month-ago levels. As such, the stock currently carries a 2-star rating. Read Morningstar's Research Report including fair value estimate here.

On the flipside, Morningstar research shows numerous LSE-listed stocks that carry 4 stars and are therefore deemed to be trading below their fair value. Several of the U.K. banks feature on the 4-star list, as do a handful of the global diversified miners, among others. Just two LSE stocks under our coverage currently carry 5-star ratings, as shown below.

5-Star Stocks
BG Group
Shares in BG Group (BG.) remain 2.7% lower over the three months to October 14 but despite rallying 12.5% over the last 12 months the natural gas producer, one of our favourite energy names, trades almost a third lower than our fair value estimate. Read Morningstar's Research Report including fair value estimate here.

Royal Dutch Shell
Shares in Royal Dutch Shell (RDSB) were hit hard at the start of August, losing almost a quarter of their value in a matter of weeks, but even though the stock has recovered much of this drop, and is down just 1.7% over the past three months, our analysis points to the market still undervaluing this oil supermajor. Read Morningstar's Research Report including fair value estimate here.

All Morningstar.co.uk users can see a stocks' Star Rating on its Morningstar Stock Report; Morningstar Research is available only to Premium subscribers.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Shire PLC4,896.00 GBX0.66
About Author Holly Cook

Holly Cook  is Managing Editor of Morningstar.co.uk