Investors have endured a lot of market uncertainty during 2022 so far. The market faces several risks today, including inflation, rising interest rates, and geopolitical risk. Both the stock and bond markets are suffering losses.
During uncertain times, investors may want to own companies that offer some sense of certainty in terms of cash flows and company fundamentals. 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.
But the best firms aren’t always the best stocks to buy at a given point in time. How much an investor pays to own a company–best or otherwise–is important, too. So here we’re focusing on the 10 best companies with the most undervalued stock prices today.
The 10 Best Stocks as of May 2022
The 10 most undervalued stocks from our Best Companies to Own list at the start of May are:
- Yum China (YUMC)
- Taiwan Semiconductor Manufacturing (TSM)
- Salesforce.com (CRM)
- Equifax (EFX)
- T. Rowe Price (TROW)
- Anheuser-Busch InBev SA/NV ADR (BUD)
- Adobe (ADBE)
- Veeva Systems (VEEV)
- Comcast (CMCSA)
- BlackRock (BLK)
Here’s a little bit about why we like each of these companies at these prices, along with some key Morningstar metrics. All data is as of April 29, 2022.
Yum China
- Price/fair value: 0.49
- Fair value uncertainty: Medium
- Moat trend: Stable
- Capital allocation rating: Standard
- Industry: Restaurants
Although the resurgence in COVID-19 cases has put pressure on the Chinese restaurant sector, we think Yum China, the largest restaurant chain in China, is being unduly punished: Yum China stock is 51% undervalued relative to our fair value estimate of $86.00. Morningstar senior analyst Ivan Su argues that there’s reason to be confident about restaurants such as Yum China (whose brands include KFC, Pizza Hut, and Taco Bell, among others) that have the scale to be aggressive on pricing in the near term; that provide customers greater access via robust digital ordering, delivery, and drive-through options; and that boast healthy balance sheets. “Coupled with strong brand recognition and an unrivaled supply chain, Yum China is set to be the prime beneficiary of growing Chinese fast-food spending,” he concludes.
Taiwan Semiconductor Manufacturing
- Price/fair value: 0.54
- Fair value uncertainty: Medium
- Moat trend: Stable
- Capital allocation rating: Exemplary
- Industry: Semiconductors
The stock of the world’s largest dedicated contract chip manufacturer, TSMC, has struggled this year, owing to macroeconomic uncertainty and a sluggish smartphone outlook. However, we think these headwinds have provided an enticing entry point for stock investors: TSMC’s stock trades 46% below our fair value estimate of $171.00. We foresee high-performance computing demand as the biggest growth driver in the next five years, says Morningstar analyst Phelix Lee–plus industrial and automotive demand remains strong despite a lukewarm consumer outlook. We don’t expect equipment deliveries to hurt our five-year revenue compound annual growth rate of 16.5%, he adds.
Salesforce
- Price/fair value: 0.55
- Fair value uncertainty: Medium
- Moat trend: Positive
- Capital allocation rating: Standard
- Industry: Software – Application
Salesforce hasn’t been immune to the drubbing the technology sector has experienced this year. While the enterprise cloud computing solution provider likely faces a dip in revenue growth below 20% at some point in the next few years, we think ongoing margin expansion will provide compound earnings growth of more than 20% for much longer. Salesforce has assembled a front-office empire it can build on for years to come, says Morningstar senior equity analyst Dan Romanoff. We expect the firm to continue to benefit from cross-selling and upselling, pricing actions, international growth, and continued acquisitions. “We believe Salesforce represents one of the best long-term growth stories in software,” he concludes. Salesforce stock is 45% undervalued by our measures.
Equifax
- Price/fair value: 0.63
- Fair value uncertainty: Medium
- Moat trend: Stable
- Capital allocation rating: Exemplary
- Industry: Consulting Services
One of the leading credit bureaus in the United States, Equifax faces strong headwinds today as mortgage market weakness—and a subsequent decline in mortgage credit inquires—takes a toll. We nevertheless think the market is being overly harsh: Equifax stock trades 37% below our $325 fair value estimate. In fact, we think Equifax’s Workforce Solutions segment is differentiated and growing at a healthy clip, says Morningstar analyst Rajiv Bhatia–and we think the segment’s fundamentals are strong. It’s now Equifax’s largest segment.
T. Rowe Price
- Price/fair value: 0.63
- Fair value uncertainty: Medium
- Moat trend: Stable
- Capital allocation rating: Exemplary
- Industry: Asset Managers
With both stock and bond markets struggling in 2022, T. Rowe Price endured market losses in all segments of its operations in the first quarter and saw net outflows. Nevertheless, we think T. Rowe Price is the best-positioned of the U.S.-based active asset managers we cover, says Morningstar strategist Gregg Warren. T. Rowe stock is about 37% undervalued relative to our current fair value estimate. The firm’s size and scale of operations, brand strength, consistent record of active fund outperformance, and reasonable fees distinguish it from the pack, he adds. And with two thirds of its assets under management held in retirement accounts, T. Rowe has a stickier client base than its competitors, too.
Anheuser-Busch InBev SA/NV
- Price/fair value: 0.64
- Fair value uncertainty: Medium
- Moat trend: Stable
- Capital allocation rating: Exemplary
- Industry: Beverages – Brewers
Brewer Anheuser-Busch InBev has a vast global scale and regional density. The company has a history of buying brands with promising growth platforms and then expanding distribution while ruthlessly squeezing costs from the businesses, which contributes to the company’s exemplary capital allocation rating. “AB InBev has one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators,” says Morningstar director Philip Gorham. We think the market has underappreciated AB InBev stock for a long while: The stock trades 36% below our fair value estimate of $90.
Adobe
- Price/fair value: 0.64
- Fair value uncertainty: Medium
- Moat trend: Stable
- Capital allocation rating: Exemplary
- Industry: Software – Infrastructure
Another victim of 2022′s tech-stock selloff, Adobe stock is undervalued by about 36% after spending much of 2021 looking overvalued by our metrics. Adobe is a leader in content creation software thanks to its Photoshop and Illustrator solutions, both of which appear in the broader subscription-based Creative Cloud. Although some investors appear concerned about competition at the low end, we think Adobe’s dominance is unencumbered, says Morningstar senior analyst Dan Romanoff. Recent price increases make sense, we think, given the company’s expanding portfolio.
Veeva Systems
- Price/fair value: 0.66
- Fair value uncertainty: Medium
- Moat trend: Positive
- Capital allocation rating: Standard
- Industry: Health Information Services
Veeva is the leading provider of cloud-based software solutions in the life sciences industry. Given its tech-leaning business, Veeva stock has gotten beaten down in 2022 and is about 34% undervalued relative to our $275.00 fair value estimate. We like the stock at this price, given the company’s strong retention rates, continued development of new applications, increasing penetration with existing customers, addition of new customers, and expansion opportunities outside of life sciences, says Morningstar analyst Dylan Finley. We think the company can extend its market leadership, and we therefore award the company a positive Morningstar Moat Trend Rating.
Comcast
- Price/fair value: 0.66
- Fair value uncertainty: Medium
- Moat trend: Stable
- Capital allocation rating: Standard
- Industry: Entertainment
Growth in Comcast’s cable business has slowed, and we expect it to continue to slow as more customers access fiber and wireless network alternatives. But we think the falloff in Comcast stock suggests years of steep customer losses–which we don’t think is likely, says Morningstar director Mike Hodel. Comcast stock trades about 34% below our fair value estimate of $60.00 today. In the most recent quarter, churn was at a record low but new connections declined–a dynamic we expect to continue. Longer term, we think the fixed-wireless threat to Comcast is limited, and the company continues to generate strong cash flow and maintain a solid balance sheet.
BlackRock
- Price/fair value: 0.67
- Fair value uncertainty: Medium
- Moat trend: Stable
- Capital allocation rating: Exemplary
- Industry: Asset Management
The largest asset manager in the world, BlackRock continues to post impressive inflows, particularly in light of the volatility in the stock and bond markets. Despite the company’s resilience, BlackRock stock has taken it on the chin this year; the stock is undervalued by 33% relative to our $930 fair value estimate. An expanding ETF market, improved active fund operations, the adoption of ESG investing, increased multi-asset and alternatives exposure and ongoing technology efforts should drive growth, says Morningstar strategist Gregg Warren. “While fee compression and other industry headwinds have blunted the operating leverage inherent in the asset-management business, we still see BlackRock generating adjusted operating margins in a 44%-46% range over the next five years, compared with 44.4% on average during 2017-21,” he adds.
The Best Companies to Own in 2022
You can review all of the companies on our Best Companies to Own list and dig into our methodology, which includes definitions for the key Morningstar metrics included in this article. Those with specific interests can drill down with our Best International Companies to Own, Best Sustainable Companies to Own, or Best Innovative Companies to Own lists, too.
https://www.morningstar.com/articles/1091882/the-10-best-companies-to-invest-in-now
