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DIG THE DATA: Morningstar analysts pinpoint the most undervalued companies in the following sectors: insurance, banks and oil & gas

Alanna Petroff 16 January, 2013 | 6:31PM
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European fund managers believe insurers, banks and oil & gas companies are the most undervalued right now, according to the latest BofA Merrill Lynch Fund Manager Survey.

The January survey found that many European fund managers agreed that there was value in the oil & gas sector, with a net 30% of managers thinking the overall sector was undervalued. Banks and insurers were not far behind on the list of undervalued sectors.

Hunting for Cheap Stocks

With this information in mind, I did a scan of European-domiciled equities in Morningstar Select to see if I could find any companies within these three sectors that stood out as particularly undervalued. I found a number of undervalued companies specifically within the oil & gas sector...

Oil & Gas:
According to Morningstar analysts, the most undervalued oil & gas companies include BG Group (BG.), Royal Dutch Shell (RDSB), Saipem (SPM) and Technip (TEC). Two other undervalued oil & gas companies that were formerly based in Houston but moved to Switzerland (primarily for tax purposes) are Noble Corporation (NE) and Transocean (RIG). All these companies currently have four-star ratings from Morningstar.

Noble Corporation presents one of the best value opportunities out of the bunch, said Morningstar analyst Stephen Ellis.

"As an offshore driller, Noble is well positioned to benefit from the secular trends toward more deep-water drilling. We forecast deep-water oil will be an important contributor to the overall global oil supply over the next few years," stated Ellis in his latest research report.

Meanwhile, BG Group is trading well below its fair value estimate of 1,400 pence per share that was set by Morningstar analyst Allen Good.

"BG’s recent production guidance revision was disappointing and removed any remaining catalysts for BG shares in the near term, in our opinion," said Good. "While we think the company could face an uphill climb as it seeks to regain investor confidence, ultimately we see shares as undervalued at current levels given the longer-term growth potential remains intact." 

According to Morningstar analysts, the most undervalued insurer in Europe is Aegon (AGN), which currently has a four-star equity rating. 

This insurer is based in Europe, but Morningstar analyst Vincent Lui calls it a "US insurance company in disguise."

"While Aegon has its roots in the Netherlands, the company is often viewed as a US insurer. The company generates approximately 70% of pre-tax earnings from the region, with another 20% of earnings coming from the Netherlands, the United Kingdom, and Canada," said Lui. "As a company, Aegon focuses on three core businesses: life insurance, pensions, and asset management, with life insurance contributing more than 50% of pre-tax earnings."

Lui says he is enthusiastic about the company's current turnaround strategy and believes the aging baby boomer population provides the company with some unique opportunities.

"Corporate pensions and asset management could offer attractive growth opportunities for Aegon, as aging baby boomers look for ways to hedge the risk of outliving their savings," he said.

According to Morningstar analysts, the most undervalued bank in Europe is Julius Baer Gruppe (BAER), which currently has a four-star equity rating. 

"We’re optimistic about Baer’s acquisition of Merrill Lynch’s non-US wealth management operations, which we think will help the bank to build scale in fast-growing markets and lessen its dependence on Swiss offshore banking," said Morningstar analyst Jim Sinegal. "While Julius Baer may not enjoy the same worldwide name recognition as some of its Swiss competitors, we see that as an advantage—the private bank’s brand has been relatively untarnished by scandals or heavy losses during the financial crisis."

About Morningstar's Star Rating System

Morningstar's Star Ratings for equities are calculated based on what the current value of the shares are in the market versus what Morningstar analysts believe the fair value of the shares should be.

A high star rating, such as a 4- or 5-star rating, indicates that Morningstar believes the shares are very undervalued and this could be a time to buy in for cheap. Alternatively, if you see a stock with 3-stars that indicates the stock is being fairly valued by the market. Stocks with 1- or 2-star ratings are being overvalued by the market, according to Morningstar analysts. 

The BofA Merrill Lynch survey also found that global fund managers are feeling increasingly optimistic and are putting more money into banking stocks this January. Read the article "Global Fund Managers Feeling Bullish" to find out more about these investment trends.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Aegon NV5.92 EUR0.30Rating
Julius Baer Gruppe AG52.18 CHF-0.69Rating
Saipem SpA2.35 EUR1.60Rating
Transocean Ltd5.30 USD2.32

About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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