8 Cheap, High Quality Stocks to Buy: Morningstar Top Strategist

  • Investment analysis firm Morningstar says US stocks are near their lowest prices of the last decade.
  • Chief US Market Strategist Dave Sekera says growth stocks and small caps are especially cheap.
  • Those areas have been hit hard in 2022, and investors aren’t sure it’s safe to get back in.

Some experts who are bearish on the stock market say that even after all the selling that’s gone on in the last few months, stocks still look expensive.

They’re concerned that stocks could keep falling as companies grapple with challenges like rising interest rates, high inflation, elevated energy prices, changing consumer preferences, and signs of a weakened economy.

But Morningstar Chief US Market Strategist Dave Sekera thinks equities are surprisingly cheap right now.

Sekera says that at the end of May, US stocks were as cheap as they were during the major market scares of 2011 and 2018, and at their recent lows they were almost as inexpensive as they were during the COVID crash.

“Since 2011, on a monthly basis, there have only been a few other instances in which the markets have traded at such a large discount to our intrinsic valuation,” he wrote. “We think the pendulum has swung too far the other direction and view the U.S. equity market as being significantly undervalued for long-term investors.”

Sekera is evaluating companies based on Morningstar’s estimates of their fair value, which is predicated on how much cash the companies are expected to generate and how predictable those cash flows are.

Sekera says growth stocks were surprisingly the least expensive among the companies he analyzed, and were trading at a 19% discount to Morningstar’s estimates of their fair value. He adds that small-cap stocks, which have also been hit hard in 2022, were trading at a discount of the same size.

Sekera writes that more


is to be expected because of the major challenges stocks are facing, but he says investors shouldn’t get out of this market.

“We think that now is not the time to be reducing exposures but to be adding judiciously — especially in high-quality companies — based on your investment plan and goals,” he said.

He writes that the following eight companies all have wide economic moats that should give them durable advantages over the long run, but despite their leads over competitors, they all fell to unusually low valuations in May.

Morningstar rates companies on a scale of one to five stars based on the companies’ “economic moat,” the fair value of the stock and its confidence in that value, and how expensive the stock is relative to that price. All of the following companies were rated five stars.