3 Undervalued US Stocks Best in Class

Ahead of tomorrow's US Presidential Election we highlight three American stocks with clear advantages over their competitors - but who are currently trading at less than fair value

Emma Wall 7 November, 2016 | 10:52AM
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On Friday, the US stock market fell for the ninth day in a row. It is hardly surprising that in the run up to one of the most controversial US Presidential elections in modern history the market has got the jitters.

It is important to note that despite these consecutive falls the S&P 500 has not moved much – down just 3 points on Friday to 2,085 it sits at similar levels to where it was a year ago, and is up from 2,013 at the start of the year.

However, there are sectors of the market which have been hurt in this election campaign – and many more that lie at risk dependent on the outcome of tomorrow’s vote. Pharmaceutical stocks have been significantly devalued following Hillary Clinton’s promise to crackdown on drug price hikes, and should Donald Trump come to power, his protectionist stance will damage global traders.

Whether Clinton or Trump is successful in their bid for the White House, there will be opportunities for the savvy investor. Quick-witted traders picked up many a bargain following the shock Brexit vote result – but for every value-driven stock picker snapping up financials, domestic equities and housebuilders, there was a panicked seller purging what they saw as risky stocks.

Perhaps investors looking to add to their North America exposure would be better off sticking to long-term fundamentals instead. According to Morningstar equity research there are 10 US listed stocks which are currently trading at significantly less than their fair value estimate – known as five-star stocks – which also have a stable or growing economic moat. An economic moat is a sustainable competitive advantage over companies within the same sector. We highlight three of those companies below.

Walt Disney (DIS)

While Disney is a media conglomerate, Morningstar analysts view the company as two distinct yet complementary businesses: media networks, which include ESPN and ABC, and Disney-branded businesses, including parks, filmed entertainment, and consumer products. The crown jewel of Disney's media networks segment is ESPN. It dominates domestic sports television with its 24-hour programming on ESPN, ESPN2, and its growing sister networks. ESPN has exclusive rights within both NFL and college football, the premier sports programming rights in the United States. 

Disney's other components rely on the world-class Disney brand, sought after by children and trusted by parents. Over the past decade, Disney has demonstrated its ability to monetise its characters and franchises across multiple platforms; movies, home video, merchandising, theme parks, and even musicals. 

Amgen (AMGN)

Amgen is a leader in biotechnology-based human therapeutics, with historical expertise in renal disease and cancer supportive care products. Amgen has its roots in providing supportive-care products to kidney disease and cancer patients, and free cash flow as a percentage of sales hovers near 40% as Amgen undertakes massive cost-cutting and improves manufacturing. 

Amgen markets several blockbuster biologic therapies in the oncology and immunology markets, giving it the intangible assets that form the foundation of its wide moat.

HollyFrontier (HFC)

HollyFrontier is an independent petroleum refiner that owns and operates five refineries serving the Rockies, midcontinent, and Southwest. HollyFrontier is a relatively small player, with 443,000 barrels per day of crude oil throughput capacity. Although it's smaller than its Gulf Coast peers, its refineries are competitively well positioned.

Perhaps more than any other refiner, HollyFrontier has benefited from the recent wide difference in price between the types of oil thanks to the position of its refining assets. While we do not expect a return to the differentials of a few years ago, HollyFrontier should continue to benefit as we project the differentials to remain well above historical levels. These projections include projects HollyFrontier has under way to extend its advantage.

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
Rating
Amgen Inc298.62 USD0.04Rating
HF Sinclair Corp52.23 USD-0.57Rating
The Walt Disney Co99.97 USD-0.12Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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