The stock market is full of uncertainty, with the S&P 500 dropping 23% from the end of last year to June 16 and then rebounding 16% since then.
So what does that mean for investors?
“During uncertain times, investors may want to own companies that offer some sense of certainty in terms of cash flows and company fundamentals,” Susan Dziubinski, director of content for Morningstar.com, wrote in a report.
“That’s where Morningstar’s Best Companies to Own list comes in. The companies that make up this list—126 in total—have significant competitive advantages.
“And we think those advantages are stable or growing. We believe the best companies have predictable cash flows and are run by management teams that have a history of making smart capital-allocation decisions.”
Morningstar put together what it considers the 10 most undervalued companies on its best-to-own list, as of Aug. 8. Valuations are measured against Morningstar analysts’ fair-value estimate for each stock.
1. Taiwan Semiconductor (TSM) , the chipmaker. Price-to-fair-value: 0.54.
2. Yum China (YUMC) , the owner of fast-food restaurant chains. Price-to-fair-value: 0.56.
3. Anheuser-Busch InBev (BUD) , the brewer. Price-to-fair-value: 0.59.
4. Salesforce (CRM) , the business-software company. Price-to-fair-value: 0.62.
5. Comcast (CMCSA) , the media/communications company. Price-to-fair-value: 0.64.
6. Zimmer Biomet (ZBH) , the medical-device company. Price-to-fair-value:0.65.
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7. Guidewire Software (GWRE) , the insurance-software provider. Price-to-fair-value: 0.65.
8. Equifax (EFX) , the credit-reporting firm. Price-to-fair-value: 0.66.
9. TransUnion (TRU) , the credit-reporting firm. Price-to-fair-value: 0.68.
10. Masco (MAS) , a home-improvement-product maker. Price-to-fair-value: 0.7.
Morningstar’s Take on Taiwan Semi
“We note two long-term growth factors for TSMC,” Morningstar analyst Phelix Lee wrote in a commentary. “First, the recent consolidation of semiconductor firms is expected to create demand for integrated systems made with the most advanced nodes.
“Second, organic growth of [artificial intelligence], internet of things, and high-performance computing applications may last for decades,” he said.
“AI and HPC play a central role in … solving complex problems like autonomous driving. … Cheaper semiconductors have made integrating sensors, controllers and motors to improve home, office and factory efficiency possible.”
Morningstar’s Take on Yum China
“The resurgence of covid-19 cases has again put the Chinese restaurant sector under pressure,” Morningstar analyst Ivan Su wrote in a commentary. “Nevertheless, we believe investors should find confidence in restaurants possessing the scale to be more aggressive on pricing near term.”
He also likes companies with strong digital ordering, delivery, and drive-through capabilities; and companies with healthy balance sheets.
“Yum China satisfies these investment criteria,” Su said. “And we identify several opportunities for it to gain share in the fragmented, US$700 billion Chinese restaurant market.”
The author of this story owns shares of Comcast.