Four 4 Star Rated Stocks

Stocks with a 4 star Morningstar rating are trading below their estimated fair value. We look at some of options for investors

Holly Black 7 January, 2020 | 11:09AM

Four stars

Investors looking for inspiration for stocks to back in 2020 could take note of the Morningstar rating for stocks. The scale from one to five indicates how far above or below a share is trading from its so-called Fair Value Estimate - what Morningstar analysts believe it is worth.

Just two UK-listed stocks currently hold a five-star rating (tobacco giants Imperial Brands and British American Tobacco), which indicates the best opportunity for returns based on the share's price compared to its fair value, along with a number of other factors such as whether it has an Economic Moat (barriers to entry from competition) and its Uncertainty Rating. 

But almost 20 UK stocks are sitting at a four-star Morningstar rating at the moment, and could be worth a look for investors willing to tolerate some risk. Here we look at some of the options: 

Carnival (CCL)

Morningstar Rating: 4 stars
Dividend yield: 4.39%
1 Year Return: -4.45%
Share Price: £34.81
Morningstar Fair Value Estimate: £45.20

With more than 100 ships in service and capacity for 200,000 passengers, Carnival is the largest company in the cruise industry. But the firm’s brand was hurt by the tragedy of the crashing of the Costa Concordia in 2012 while it is also vulnerable to geopolitical risks, which can affect fuel prices and tourism to certain destinations. 

The Outlook: While Carnival is also attempting to broader its appeal to a younger audience, an ageing population, growing number of wealthy retirees and a rise in later-life travel are all key trends for cruise operators. The 65-and-older demographic is growing at a faster rate than the industry can increase capacity.

Carnival is set to receive 18 new ships by 2024, boosting its supply, and Morningstar analyst Jaime Katz also expects to see cost-cutting through better procurement and fuel efficiency. The company’s scale is a robust barrier to competition, stopping new entrants ramping up their market share – large ships cost between $500 million to $1 billion to build, not something many companies can afford – while growth in Asia is a huge driver for future growth, where the number of cruise passengers in China alone reached 2.4 million in 2018.

Which Funds Hold the Stock? According to Morningstar Direct data, Mirabaud UK Equity High Alpha has 3.82% of its assets in the trust - a fair proportion but not enough to make it into the fund's top 10 holdings. Elsewhere, the L&G UK Special Situations Trust has 3.11% of its portfolio in the stock and Bronze-rated Rathbone Income fund 2.53%.

Pearson (PSON)

Morningstar Rating: 4 stars
Dividend yield: 2.95%
1 Year Return: -32.11%
Share Price:
Morningstar Fair Value Estimate: 880p

Education publisher Pearson has struggled in recent years as it has sold off various parts of the  group to streamline its business. It has offloaded profitable ventures such as publishing house Penguin Random House and the Financial Times Group. Meanwhile, the North American higher education, where it has chosen to focus, has changed considerably as students favour online resources over pricey textbooks.

The Outlook: Pearson surprised with a profit warning in September, but Morningstar senior equity analyst Michael Field thinks the resulting share price fall was actually a good opportunity to top up shares. Pearson has been making great efforts to shift to digital offerings and by the end of 2019 it was estimated that 65% of revenues would come from digital. The largest educational provider globally, Field thinks the firm has an advantageous position and the company has an economic moat, albeit a narrow one.

Which Funds Hold the Stock? It may come as no surprise that unloved Pearson is a popular holding in value and special situations funds, which are focused on finding out of favour stocks the manager believes are misunderstood by the market. It is a top five holding in the Silver-Rated Schroder Recovery fund making up 4.41% of the portfolio, and 4.13% of Fidelity Special Values Trust (FSV). Also among its largest shareholders is the Silver-Rated Lindsell Train Global Equity fund, which has 3.37% of its assets in the stock.

Sainsburys (SBRY)

Morningstar Rating: 4 stars
Dividend yield: 4.89%
1 Year Return: -8.54%
Share Price: 226.6p
Morningstar Fair Value Estimate: 271p

Sainsbury’s has a “no moat” rating from Morningstar, meaning it has no barriers to entry against its competitors. Instead, UK supermarkets rely on brand loyalty, low prices and often simply being the nearest store to their customers. Underlying profits fell 10% according to the firm’s full year results in November but it outperformed rival Morrisons, and clothing sales were up 3.3%.

The Outlook: Sainsbury’s has historically distinguished itself as a higher-quality supermarket, but this meant it was slow to respond to the UK consumer shift to a focus on value – a trend which has seen discount supermarkets Aldi and Lidl take market share in recent years.

Sainsbury’s proposed a merger with Asda, which may have helped tackle this, but the move was rejected by the Competition and Markets Authority. Morningstar equity analyst Ioannis Pontikis thinks a different partnership with a smaller UK grocer could be the way forward. “Sainsbury’s has a difficult path ahead but has all the right elements in place to regain market share momentum: a high quality food and non-food offering, sophisticated online operations, scale and a strong convenience store network.”

Which Funds Hold the Stock? Among the largest investors in the stock are the Invesco UK Focus and Invesco UK Growth funds with 4.22% and 3.44% of their assets in the company respectively. It is also held by Crux UK Opportunities (4.83% of assets) and the Schroder Responsible Value UK Equity fund, (2.53%), which also invests in competitor Tesco. 

BP (BP)

Morningstar Rating: 4 stars
Dividend yield: 6.47%
1 Year Return:  2.93%
Share Price: 504.1p
Morningstar Fair Value Estimate: 670p

BP reached a settlement with the US government over the 2010 Deepwater Horizon disaster in 2015, which was a huge positive for the oil giant as it removed a great deal of uncertainty, but it still remains on the hook for $23 billion over the next 17 years. As 2020 begins, there is more anxiety for this industry as tensions between the US and Iran ramp up, which could have a knock-on effect on the price of the black stuff. In the first week of the year, the crude oil price reached its highest level since April 2019 and some have predicted it could climb to $150 a barrel if war breaks out. Rival Royal Dutch Shell also has a four-star rating from Morningstar.

The Outlook: Morningstar analyst Allen Good upgraded BP from a “No Moat” to “Narrow Moat” rating in December, confident that the company can deliver positive returns even with an oil price as low as $60 after cost-cutting. Unsurprisingly, the stock has a high uncertainty rating, however, and the firm’s fortunes are intrinsically tied to the oil price, which is often volatile and unpredictable. While a higher oil price is technically more profitable, if it is driven higher by geopolitical tensions or even war there may be supply and logistical issues which could weigh on the business.

Which Funds Hold the Stock? A staple holding for UK-focused and commodities funds, top investors include BlackRock Energy and Resources Trust (BERI), Investec Global Energy and Smith & Williamson UK Equity Income, each with more than 8.6% of their portfolio in the stock. It can also be accessed through most passive FTSE trackers including the iShares FTSE 100 and Xtrackers FTSE All-Share ETFs.

UK-Listed 4-Star Rated Stocks 

Name Ticker 12 Month Yield (%) 1 Year Total Return (%)
Advanced Medical Solutions AMC 0.46 15.69
Aviva AV 7.21 17.03
Banco Santander BNC 6.03  -6.90
BP BP  6.47  2.93 
BT Group BT.A 7.95  -12.10 
Bunzl BNZL  2.41  -10.08
Carnival CCL 4.39 -4.45
G4S GFS 4.55 9.13
HSBC HSBA 6.66 -4.83
Kingfisher KGF 4.94 6.97
Pearson PSON 2.95 -32.11
Reckitt Benckiser RB 2.80 6.12
Rolls-Royce RR 1.73 -16.60
Royal Dutch Shell RDSB 6.36 2.51
Sainsbury SBRY 4.89 -8.54
Unilever ULVR 3.25 7.57
Vodafone VOD 5.16 -2.13
WPP WPP 5.60 31.83

Source: Morningstar Direct

January 7, 2020

     

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
BP PLC486.10 GBX0.82
Carnival PLC3,428.00 GBX-0.75
Pearson PLC586.95 GBX0.92
Sainsbury (J) PLC209.75 GBX1.43

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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