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4 stocks undervalued with momentum


At Morningstar, we talk a lot about the dangers of running after performance. For example, our annual review of mutual fund returns shows that even though the gap between investor returns and total returns has narrowed, investors still often make timing errors, reducing their returns over time. over time. In fact, we’ve even explored how adding “unloved” categories (those mutual fund categories that aren’t popular right now) to a portfolio’s margins can add value.

As such, an article suggesting that investors view stocks that have skyrocketed seems out of Morningstar’s character. But listen to us.

Outperformance and overpricing do not always go hand in hand. We base our estimates of the fair value of stocks on our forecasts of future cash flows; We also take into account the predictability of these cash flows, encapsulated in our uncertainty ratings. Recent performance plays no role in our assessment of fair value. We focus on long-term intrinsic value. And as a result, stocks that have rebounded may not have reached our estimate of their long-term intrinsic value.

Today we’re taking a look at some high-quality stocks that have worked well so far in 2021 that may have more leeway. Specifically, we looked for stocks that have returned more than twice the overall market this year; the overall market recorded a return of 11%, based on the Morningstar U.S. Market Index as of this writing. We have made further selection to include only stocks that achieve Morningstar Economic Moat Broad ratings and trade in a 4 or 5 star range. Despite their recent surges, these stocks still seem cheap to us.

Here are our analysts’ business insights on each name. All data is as of May 26, 2021.

Alphabet (GOOG)

Morningstar Rating:
YTD Yield: 38.91%

“Alphabet leads the online search market with a global Google share of over 80%, resulting in strong revenue and cash flow growth. We expect continued growth in the company’s cash flow. because we remain confident that Google will maintain its leadership in the search market. We anticipate that YouTube will contribute more to the company’s bottom line, and we consider investing some of that money in moonshots to be attractive. Whether they will generate positive returns remains to be seen, but they have significant upside potential.

“Google’s ecosystem is growing stronger as its products are adopted by more users, which makes its online advertising services more attractive to advertisers and publishers and leads to increased online advertising revenue. , which we believe will continue to grow at double-digit rates after the pandemic and for the next five years. The company uses technological innovation to improve the user experience in nearly all of its Google offerings, while making selling and buying ads efficient for publishers and advertisers. The adoption and use of mobile devices has increased. The online advertising market has We have seen Google participate in it through the growing market share of its Android mobile operating system, helping it drive revenue growth and maintain its leadership in the space.

“Among the areas of the Company’s investment, we particularly applaud the efforts to further penetrate the growing public cloud market. Google quickly leveraged the technological expertise it applied in building and maintaining its private cloud platform to increase its market share, as far as Alphabet’s more futuristic projects go, well that most do not yet generate income, the advantage is attractive if they are successful, as the company targets new markets. , Waymo is a good example: based on various studies, it could tap into a market valued at tens of billions of dollars over the next 10 to 15 years. “

Ali Mogharabi, senior equity analyst

Dig deeper: Alphabet, Facebook remain attractive

Enbridge (IN B)

Morningstar Rating:
YTD Yield: 24.84%

“Enbridge is an energy distribution and transmission company in the United States and Canada. It operates crude and natural gas pipelines, including the Canadian Mainline. It also owns and operates the largest natural gas distribution company in Canada.

“Enbridge is well positioned to take advantage of the growing momentum in oil sands supply with its mainline and regional oil sands pipelines. The regulated mainline generates attractive tolls and represents approximately 70% of Canada’s pipeline capacity. The network provides refineries with access to a variety of markets, adding The company also operates regional pipelines that connect directly to the Mainline, each sourced from existing oil sands projects and based on long-term contracts.

“While crude pipelines are Enbridge’s bread and butter, the company operates a diverse energy portfolio. The gas distribution activities benefit from regulated returns and provide the company with reliable cash flows. Enbridge also operates natural gas pipelines that complement its crude pipeline network and are supported by long-term bought-in contracts. Renewable projects also provide opportunities for growth from secure environmental, social and governance projects. , but represent around 3% of the company’s EBITDA.

“We believe investors are wrongly concerned about the underutilization of the main pipeline system due to production cutbacks and the construction of competing pipeline expansions. expected levels once crude prices normalize to our West Texas Intermediate mid-cycle forecast of $ 55 per barrel. As a result, we expect the mainline to operate near full capacity. We recognize that our bullish thesis is driven by our long-term forecast for production growth and pipeline utilization. As such, it could take years for the market to adjust to our way of thinking. However, the long and winding road offers significant upside potential for long-term investors. “

Stephen ellis, strategist

Polaris (PII)

Morningstar Rating:
YTD Yield: 38.23%

“Polaris is one of the oldest brands in the powersports industry. We believe that its brands, innovative products and lean manufacturing give the company a wide economic divide and that it intends to capitalize on its research and development, solid quality, operational excellence, However, Polaris brands do not benefit from the costs of change, and with peers innovating faster than in the past, this could compromise the company’s ability to take prices and share consistently, especially in times of bloated recalls or aggressive industry discounts.

“Polaris had sacrificed some financial flexibility after its transformational acquisitions of TAP and Boat Holdings, but debt service metrics were quickly scaled back thanks to expanding EBITDA and economies of scale (with debt / Adjusted EBITDA on average less than 1 times more than our forecasts). This unlocks Polaris’ ability to continue to serialize strategic businesses (with likely opportunities in the boat segment and the parts and accessories segment), which could help drive additional demand. For now, we anticipate 19% organic growth in 2021, as Polaris continues to fill dealer inventories, before returning to more normalized single-digit industrial growth in 2022. International expansion (percentage of sales low to double digits) also remains promising and could drive demand, especially as Polaris increases its global operational presence with a larger physical presence abroad.

“As evidenced by the strong returns on invested capital (at 18% including goodwill in 2020), Polaris still has top-notch branded goodwill in its segments, supporting consumer interest and indicating that the asset The company’s brand intangible is intact. However, with constraints in the supply chain, 2021 could see some volatility in market share gains, depending on the availability of certain retail products. to monitor market share trends to ensure market share stabilization, signaling that the company’s competitive advantage is intact. “

Jaime Katz, senior analyst

To concern: A leader in powersports – on sale

Wells fargo (WFC)

Morningstar Rating:
YTD Yield: 54.41%

“Wells Fargo remains one of the top deposit collectors in the United States, even after bank scandals and an asset cap, with the third highest number of deposits in the United States, behind JPMorgan (JPM) and Bank of America (baccalaureate). Its strategy has historically been based on close client relationships and sound risk management – and being perfectly positioned for the mortgage market after the global financial crisis didn’t hurt either. We don’t expect the mortgage boom to ever return, and the bank’s operational competence has been questionable for years, but we still see a bank with the right fundamentals in place and the potential to improve over time. time.

“Wells Fargo has arguably one of the best branch networks in the United States, excels in the mid-market business space and has a strong advisory network. This gives the bank many elements for a strong franchise, but satisfactory operational execution of regulators and restoring operational efficiency remain issues that need to be addressed. We believe it will be many years before Wells fully leverages its current franchises. years to fully recover and optimize operations and returns.

“The first step in continuing the Wells Fargo turnaround is to remove the asset cap. again being able to increase the toll and come back to some form of offense instead of being constantly on defense. Along the way, the bank must become a more efficient operator. It’s going to be a multi-year process, and management has defined roughly four years of initiatives that are expected to save billions of dollars along the way. We expect that even after these programs end, the bank will remain one of the least efficient operators under our cover, but returns should nonetheless improve over time, and we would not. Don’t be surprised to see other cost savings identified along the way.

“Wells Fargo remains a work in progress and is also very sensitive to interest rates, and it will take years to better optimize the franchise.”

Eric Compton, senior analyst

Dig deeper: Wells Fargo releases reserves in first quarter

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