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

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Superannuation

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.

Economy

Should Australia follow Trump's new brand of capitalism?

A new brand of capitalism may be emerging - one where governments take equity in private companies. Is it state overreach, or a smarter way to fund public goods without raising taxes?

Gold

Why gold may keep rising - and what could stop it

Central banks are buying, Asia’s investing, and gold’s going digital. The World Gold Council CEO reveals the structural shifts transforming the gold market - and the one economic wildcard that could change everything. 

Investment strategies

Fact, fiction and fission: The future of nuclear energy

Nuclear power is back in the spotlight, including in Australia. For investors exploring the sector, here are four key factors to consider in this evolving energy landscape. 

Taxation

The myth of Australia’s high corporate tax rate

Australia’s corporate tax rate is widely seen as a growth-killing burden. But for most local investors, it’s a mirage - erased by dividend imputation. So why is it still shaping national policy? 

Taxation

Should we change the company tax rate?

The headline 30% corporate tax rate masks a complex system of dividend imputation and franking credits that ensures Australian shareholders are taxed only once, challenging traditional measures of tax competitiveness. 

Investing

Noise cancelling for investors

A lot of the information at an investor's fingertips today has little long-term value. The modern investing greats are not united by access to faster information, but by their ability to filter out what doesn’t matter.

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.