A way to judge stocks with data.
The basic idea of investing is simple. If an investor can buy stocks that are undervalued, the stocks’ share prices should rise over time to reflect their true value more accurately. But one of the key components of that formula is assigning an accurate valuation to a stock. Analysts use countless metrics in generating their stock price targets. Even then, the range of analyst price targets for a particular stock can be huge. The Morningstar analyst team includes an uncertainty rating for each stock along with its fair value estimates. Here are nine stocks to buy with low uncertainty ratings.
Anixter International (ticker: AXE)
Anixter is an electrical, network security and utility power solutions company. Analyst Brian Bernard says Anixter has a significant potential near-term upside due to its pending merger with Wesco International (WCC). Bernard says the combined company will generate $200 million in cost synergies and $9 in per-share earnings within three years of the deal's closing. He values the combined entity at $112 per share. Anixter investors are positioned to get $70 cash, $15.89 in preferred stock and 0.24 shares of Wesco per Anixter share owned. Morningstar has a “buy” rating and $113 fair value estimate for AXE stock.
British American Tobacco (BTI)
Tobacco giant British American Tobacco is a market leader in an industry that is being forced to adapt in the face of increasingly rigorous global regulations. However, in the meantime, analyst Philip Gorham says investors are too pessimistic about an undervalued stock with solid cash flow and innovative products. While cigarette volumes will likely continue to decline in the U.S. market, Gorham says there is room for price increases and margin expansion. British American also pays an attractive 5.7% dividend. Morningstar has a “buy” rating and $59 fair value estimate for BTI stock.
Anheuser Busch Inbev (BUD)
Anheuser Busch Inbev is the world’s largest brewer and the parent company of brands such as Budweiser, Beck’s and Corona. Gorham says cost inflation has been pressuring Anheuser Busch’s margins, but the company has one of the strongest cost advantages of any of its consumer defensive peers. The company is diversified geographically and has 18 different brands that generate at least $1 billion in revenue annually. Gorham projects the company will grow revenue at around 4.2% annually for at least the medium term. Morningstar has a “buy” rating and $116 fair value estimate for BUD stock.
Enterprise Products Partners (EPD)
Enterprise Products Partners is the largest publicly traded master limited partnership (MLP) and provides processing and transportation services to the energy sector. Analyst Stephen Ellis says Enterprise has world-class assets and its vertical integration differentiates it from competitors. Enterprise’s $8 billion investment in its Houston ship channel has it well-positioned to capitalize on what Ellis says will be a surge in U.S. natural gas liquid exports in the coming years. Like many other MLPs, Enterprise pays an attractive 6.1% dividend. Morningstar has a “buy” rating and $35.50 fair value estimate for EPD stock.
Magellan Midstream Partners (MMP)
Magellan Midstream Partners is a refined products and crude oil pipeline MLP. Ellis says Magellan’s high-quality pipeline assets have produced stable earnings and generated steady and predictable investor distribution growth. Magellan has been picky about its investing throughout the energy market downturn and has made several attractive acquisitions at excellent prices, Ellis says. In addition, he says heavy spending in 2019 should support growth in 2020 and beyond. Like other stocks on this list, Magellan pays an impressive 6.3% dividend. Morningstar has a “buy” rating and $72 fair value estimate for MMP stock.
Pfizer is one of the largest pharmaceutical companies in the world. Analyst Damien Conover says Pfizer’s diversified portfolio of drugs generates robust cash flow that Pfizer reinvests in its development pipeline. Pfizer’s massive scale provides competitive advantages, and its recent successful launches of several new drugs help create long-term growth opportunities. Conover says he is particularly impressed with the recent launch of cardiovascular drug Vyndaqel. In addition, the divestment of Pfizer’s off-patent division has allowed the company to increase its focus on growth and innovation. Morningstar has a “buy” rating and $46 fair value estimate for PFE stock.
Philip Morris International (PM)
Philip Morris is a global tobacco and cigarette leader and the parent company of Marlboro, Parliament and L&M brands. Gorham says Philip Morris is his top-quality stock pick among international tobacco companies, and he says the sin stock is “materially undervalued.” The company’s 28% global market share and its loyal Marlboro customer base give Philip Morris exceptional pricing power. Gorham says Philip Morris has a first-mover advantage in heated tobacco products thanks to its iQOS devices. Philip Morris pays a sizable 5.2% dividend. Morningstar has a “buy” rating and $102 fair value estimate for PM stock.
Sensient Technologies Corp. (SXT)
Sensient Technologies specializes in producing coloring, flavoring and fragrances for a wide range of consumer products. Analyst Andrew Lane says recent weakness in the company’s margins due to trade war cost inflation is only temporary. He says investors should benefit in the long term from Sensient’s dominant position in a high-growth industry. In the meantime, Lane says Sensient should be able to pass higher costs on to customers. In addition, rising demand for natural colors rather than synthetic colors should create growth and margin expansion opportunities. Morningstar has a “buy” rating and $72 fair value estimate for SXT stock.
Exxon Mobil Corp. (XOM)
Oil giant Exxon Mobil has had a difficult decade, but analyst Allen Good says the stock may be approaching a turning point. While other oil companies have taken a conservative approach to the global oil market downturn, Exxon has aggressively invested in new projects to double 2017 earnings and cash flow by 2025. In the next several years, those heavy investments that have been weighing on earnings will start to produce cash flow for the first time. Exxon shares also pay a 5% dividend. Morningstar has a “buy” rating and $85 fair value estimate for XOM stock.
Low-risk stocks in a high-flying market:
Anixter International (AXE)British American Tobacco (BTI)Anhueser Busch Inbev (BUD)Enterprise Products Partners (EPD)Magellan Midstream Partners (MMP)Pfizer (PFE)Philip Morris International (PM)Sensient Technologies Corp. (SXT)Exxon Mobil Corp. (XOM)