10 Undervalued High Quality Stocks

We've selected 10 stocks with economic moats, exemplary capital allocation ratings and which are undervalued by Morningstar metrics

Valerio Baselli 14 February, 2024 | 10:44AM
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The S&P 500 recorded a new record high on February 9, but 2024 is far from being risk-free for investors in stocks and bonds. Economic and financial conditions remain challenging and the fight against inflation will still be at the top of the central banks' agenda. Not to mention wars in various regions of the world, stresses on commodity markets, the real estate crisis and the unpredictable effects of a prolonged period of high interest rates.

In Search of Quality Stocks

In such an environment, investors may want to own stocks that can provide certainties in terms of cash flow and business fundamentals. In the US, Morningstar analysts have created the list of Best Companies to Own according to our research, identifying 137 names in total.

These companies have significant competitive advantages (an economic moat) and our analysts believe that these advantages are stable or growing. The best stocks have predictable cash flows and are managed by teams that have a history of making smart capital allocation decisions.

A company’s longevity and competitive advantage are inherently tied to sustainability, so our analysis takes environmental, social, and governance, or ESG, considerations into account. The best stocks have business models that allow them to effectively navigate evolving ESG issues that could materially impact their business. Cutting corners or taking on too much risk may work in the short run, but these tactics won’t give a company enduring success.

The companies that make our list also have predictable cash flows (or predictable amounts of money going into and out of a company), so our analysts can more accurately estimate how much the businesses are worth. These stocks also make smart decisions about how they manage and invest their money.

When you buy a stock, in fact, you own a piece of that company. It is important to understand the quality of the company you own, for the same reason you would test drive a new car before buying it.

The idea behind this list is that, in the long run, our analysts believe that a stake in a solid, high-quality stock puts investors in a far better position than the option of chasing market movements or the short-lived boom of a low-quality company.

But is the Stock Price Right?

Beware, though, the best companies are not always the best stocks to buy. The price you pay to own a company, solid or not, is also very important. This is why we are focusing on the best companies with the most undervalued share prices to date.

And more precisely, in this article we focus on the 10 best European companies with an economic moat, with an 'exemplary' Morningstar Capital Allocation Rating (a judgment on how the company's management is able to increase shareholders’ returns), with a positive Morningstar Rating (which means that they are undervalued compared to the fair value estimated by our analysis), and with a medium or low Uncertainty Rating.

The Best Companies to Own

Check out the US version of the list

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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About Author

Valerio Baselli

Valerio Baselli  is Senior International Editor at Morningstar.

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