Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 359

10 undervalued stocks if you're worried about volatility

April 2020 was a month of recovery. The All Ordinaries Index enjoyed a strong monthly gain after COVID-19 struck the market in February, rallying 9.5%. This represented the best monthly performance on record since March 1988, and so far, it has continued in May.

The All Ords has now risen almost 30% since its March 23 nadir, leaving it just 16% down from its February 24 peak. The 5% plus rally in two days earlier this week showed a lot of confidence among investors.

Investment growth | S&P/ASX All Ordinaries TR, YTD

Source: Morningstar Direct. Define drawdown as decline by 10% or more. Time Period: 2/01/2020 to 26/05/2020

However, the economic outlook remains uncertain and analysts are urging caution. April job figures showed the extent of the damage to the economy. The unemployment rate jumped to a seasonally-adjusted 6.2% but it was limited by an 'unprecedented' drop in the participation rate to 63.5%.

This means that of the 594,300 people that left employment, only 18% of these people become unemployed - that is, actively searching for work and applying for jobs - with 80% of people leaving the labour force.

In this environment, it's difficult to predict companies' future earnings and cash flows with any kind of certainty. Many are throwing their guidance out the window, slashing dividend payouts, or rushing to secure additional equity or debt to shore up their balance sheets.

Companies offering value and lower uncertainty

Morningstar analysts say there are almost 100 companies currently trading below their intrinsic value. However, only a handful of those have carved out solid (and in some cases growing) competitive advantages that will allow them to thrive for many years with low or medium fair value uncertainty ratings - meaning companies analysts feel they can estimate future cash flows with a higher degree of confidence.

These include stock transfer company Computershare (ASX:CPU), superannuation administration services provider Link Administration Holdings (ASX:LNK) and funeral home operator InvoCare Ltd (ASX:IVC).

To find stocks to fit the bill, we screened for the following:

Economic moat: First, they need to boast wide Morningstar Economic Moat Ratings - and their Morningstar Moat Trend Ratings must be stable or positive. In other words, these companies have competitive positions that are steady or even improving.

Discounted: Second, the stocks of these companies must be trading at a decent discount to our fair value estimates - selling at Morningstar Ratings of 4 or 5 stars.

Fair value certainty: Third, we need to have a high degree of certainty in our fair value estimates for the stocks of these companies, limiting our search to stocks with fair value uncertainties of medium or low. This rating represents the predictability of a company's future cash flows.

Top notch steward: Finally, we tossed out companies with Poor stewardship ratings, preferring to ride along with management teams that have a proven record of being good stewards of investor capital.

Don't think of this as a list of ‘buys’, though. Instead, think of it as a collection of names to investigate further. Morningstar Premium members can see the individual stock pages for full analysis. Morningstar Director of Equity Research, Johannes Faul, says:

"A 5-star rating does not suggest that the stocks won't drop further. Our aim is not to pick the bottom, but to highlight to investors that they can pick names up at a discount."

Quality stocks trading at a discount

This is a snapshot of how these stocks stand at the time of writing on 26 May 2020. Given the current market volatility, the valuations could jump around.

Source: Morningstar Direct

Morningstar Premium subscribers can access the full list of undervalued Australian stocks here. The latest Australian and New Zealand Best Stock Ideas list can be found here.

A free trial is available on the link below, including access to the portfolio management service, Sharesight, and a series of eight webinars that Morningstar will run during June 2020.

Emma Rapaport is an Editor for Morningstar.com.au


Try Morningstar Premium for free


 

1 Comments
Stevenpaulwatt
October 15, 2020

Great article

 

Leave a Comment:

RELATED ARTICLES

18 Aussie names for your watchlist

It’s the large stocks driving fund misery

A new income scorecard for the ASX 200

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.