US Stocks: Opportunities in an Overvalued Market

Morningstar equity analysts highlight the US companies trading at less than fair value and find the stock market as a whole is 3% over-priced

Morningstar Equity Analysts 12 May, 2017 | 9:38AM
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The market currently trades slightly above fair value, from our perspective, with the market-capitalization-weighted average, uncertainty-adjusted price/air value ratio for stocks in the S&P 500 Index that are under active Morningstar research coverage at 103% as of April 28, which is unchanged from last month’s ratio.

The S&P 500 improved 0.9% in April, closing at 2,384.19 at the end of the month. Each of the 11 sectors trade at fair value, on an uncertainty-adjusted price/fair value basis. The utilities sector was the most highly valued, trading at over 109% of fair value. Much like the prior month, the real estate sector held the cheapest valuation, trading below 98% of fair value.

Among the stocks trading at less than fair value, are those in the healthcare, financial and consumer discretionary sectors. Technology stocks and energy stocks look fully valued on a sector basis.

3 Undervalued US Stocks

Bed Bath & Beyond (BBBY)

Bed Bath & Beyond is one of the better-operated companies in the retail industry. It has a best-in-class decentralized merchandising strategy, an improving omnichannel presence, untapped international growth opportunities, and widely recognised retail brands like the namesake Bed Bath & Beyond and Cost Plus concepts.

Management has constructed a unique store layout that groups related product lines into separate areas, creating the appearance and feel of a collection of individual specialty stores. 

Tesoro (TSO)

We see Tesoro's competitive position improving over the next several years as the firm gains greater access to cost-advantaged crude. Given this, combined with operational improvements including increasing distillate yields, integrating the acquired Carson refinery, and leveraging its marketing and retail operations, Tesoro should become one of the better-positioned refiners in the challenging California market.

General Motors (GM)

We think General Motors' car models are of the best quality and design in decades. The company is already a leader in truck models, so a competitive lineup in all segments, combined with a much smaller cost base says to us that GM is starting to realise the scale to match its size. The head of Consumer Reports automotive testing even said that Toyota and Honda could learn from the Chevrolet Malibu.

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
Bed Bath & Beyond Inc15.46 USD2.38Rating
General Motors Co61.10 USD-1.08Rating

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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.