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

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

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.