Four Sectors to Ignore if You Seek Bargains: Morningstar

Morningstar analysts judge almost two-thirds of the stocks they cover to be undervalued, compared to their fair value estimates.

In light of the stock market’s drop this year, Morningstar analysts judge almost two-thirds of the stocks they cover to be undervalued, as measured by their fair value estimates.

You may be interested to learn which sectors they don’t consider to be undervalued, so that you can search for stock bargains elsewhere.

Dave Sekera, Morningstar’s chief U.S. market strategist, discussed four segments that aren’t undervalued. He spoke in an internal Morningstar interview.


“We’ve definitely seen a bit of a flight to safety, as people were looking for … companies where their earnings aren’t going to be affected nearly as much by changes in the economy,” Sekera said. “If people need healthcare, they’re going to prioritize that.”

The healthcare sector has dropped about 11% year to date, substantially less than the rest of the market, he said. “But we think that the [sector] is pretty fully valued here. It’s trading on that aggregated fair value [level] of all the healthcare stocks we cover.”

Consumer Defensive Stocks

These stocks have outperformed the broad market this year, sliding 7%, Sekera said. “We’ve got food and beverage, consumer packaged goods, supermarkets. Those are staples that people are going to need day-to-day, … somewhat recession-proof.”

So valuations have held up well, “and we’re really looking at it trading right on top of our fair values,” Sekera said.


These stocks had a positive return in the first quarter, bucking the overall market. It was “a flight to safety, people looking for those steady-income-earning companies,” Sekera said.

“Now, the utilities sector is the one we think is probably going to be most negatively impacted by inflation,” he said. “Utilities … don’t have any pricing power. They’re only able to increase pricing when their regulators allow them to do so.”

As inflation grew in the second quarter, utility stocks suffered, Sekera noted. Rising interest rates also hurt utilities. “A lot of times people use utilities as a fixed-income substitute,” he said.

Now, “utilities are fairly valued, although … maybe 4% to 5% above our fair values,” Sekera said.

That’s not “so high that you necessarily need to be selling utilities,” he said. “But it’s probably a good underweight in your portfolio at this point.”

Energy Stocks

“It was the most undervalued sector coming into the year,” Sekera said. But as oil prices rose, so did energy stocks. So now the sector is “trading pretty close to our fair value estimate,” he said.

“There may still be some opportunities in the services sectors and the pipelines. But most of the producers at this point are either fairly valued or starting to get a little overvalued,” Sekera said.

“So, I think it’s probably a good market-weight position within your portfolio.”

If energy stock prices rise again, “you can take some profits,” Sekera said. And if they fall, you can buy more shares.

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