The Opposite of GameStop

The crowd-sourced short squeeze involving GameStop over the last couple of weeks has made sensational headlines across the globe. Fueled by Reddit traders and fanned by Twitter, the coordinated buying of the stock, and the nearly 1,700% jump in the stock price in just two weeks, have left many anxious investors feeling torn between FOMO (Fear Of Missing Out) and the fundamentals of investing.

An elaborately orchestrated short-squeeze stampede may temporarily create a price rally for the shorted stock, but it does nothing to change the fundamentals of a moribund company circling the drain. Not even when a section of the investing community puts a David versus Goliath spin on the trade.

Let’s save speculative shorts bets for the glitzy gambling pits of Vegas. For the hard-earned money of long-term investors, a far better bet would be these following undervalued stocks with strong fundamentals, stable businesses and sustainable competitive advantage that will keep rewarding shareholders long after the social-media-driven valuations of unfavoured ‘meme’ stocks have turned to dust. 

Leading packaged food manufacturer, Kellogg makes cereal, cookies, crackers, and other snacks. It’s portfolio of popular brands includes Special K, Frosted Flakes, Froot Loops, Rice Krispies, Pop-Tarts, Eggo, Kashi, and Morningstar Farms. The firm generates 40% of its sales from outside the U.S.

Kellogg has been taking strategic steps to reignite its sales trajectory. These include moving away from direct store distribution in favour of warehouse delivery, divesting noncore fare, and increasing investments in manufacturing capabilities and brands. “We view these as prudent steps to support the long-term health of the business,” says a Morningstar report, pointing to the sizeable stock price discount and the near 4% dividend yield. “In a sector where undervalued opportunities are few and far between, investors should consider snacking on wide-moat Kellogg.”

“We’ve ascribed to the notion Kellogg is poised to profitably reignite its sales trajectory,” says Morningstar sector director, Erin Lash, who pegs the stock’s fair value at US$82, significantly above its current price. The firm’s sustainable competitive advantage, or wide moat, stems from intangible assets and cost edge, reflecting “Kellogg's ability to generate returns above its cost of capital over the next two decades,” she adds. 

Beverage behemoth, Coca-Cola owns world’s leading carbonated beverage brands including Coke, Fanta, and Sprite, as well as nonsparkling brands, such as Minute Maid, and Georgia Coffee. The company entered the hot-beverage market after buying British coffee giant Costa.

Big Red generates most of its revenue internationally and is well positioned to benefit from the growing wealth in emerging markets. “Coca-Cola’s ubiquity and brand resonance in the non-alcoholic beverage category has been going strong for over 130 years, and we see structural dynamics that will ensure this persists,” says a Morningstar equity report.

Emerging markets account for more than 40% of sales with burgeoning middle classes and low per-capita CSD consumption. “The runway for growth is supported by ample room for share gains as well as geographic tailwinds,” asserts Morningstar equity analyst Nicholas Johnson, who forecast “commercial drinks will become a larger portion of beverage consumption globally, and see the company executing against each of its market-specific strategies.”

While facing COVID-19 disruption, secular headwinds from consumer sentiment, and stiff competition, Coke is “more than equipped to defend its turf” and is set to bounce back this year, says Johnson, who pegs the stock’s fair value at US$54.
 

Biotech major Biogen (BIIB) makes and sells multiple sclerosis (MS) and cancer therapies. The company also has several drugs in phase 3 trials in neurology and neurodegenerative diseases.

“We think Biogen's specialty-market-focused drug portfolio and novel, neurology-focused pipeline create a wide economic moat,” says a Morningstar equity report. Biogen’s product portfolio includes many blockbuster drugs for MS, an autoimmune disorder that affects more than 2.3 million people worldwide. Further, the U.S. Food and Drug Administration (FDA) this week approved a new intramuscular injection route of administration for Plegridy for the treatment of relapsing forms of multiple sclerosis (MS), effectively broadening Biogen’s portfolio of MS treatments.

Outside of MS, Biogen has strong human genetic validation for its neurology pipeline. The firm has refocused the pipeline on “neurodegenerative diseases and neurology-related indications, building a strong team in neurology drug discovery and emphasizing small, tuck-in acquisitions,” says Morningstar sector director Damien Conover, who recently lowered the stock’s fair value from US$354 to US$346, after the U.S. FDA's decision to push back approval for Biogen’s Alzheimer’s disease drug aducanumab.

World’s largest defense contractor and fighter aircraft manufacturer, Lockheed Martin (LMT) operates Aeronautics (the F-35 program), rotary & mission systems (the Sikorsky helicopter business), missiles and fire control (missiles and missile defense systems), and space systems (satellites).

“We view Lockheed Martin as the highest-quality defense prime contractor, given its exposure as the prime contractor on the F-35 program and its missile business,” says a Morningstar equity report.

Given that the defense budget and the allocation of the budget is a political process and difficult to predict, wide moats are prevalent in the defense business. “We favor companies with tangible growth profiles through a steady stream of contract wins, ideally to contracts that are fulfilled over decades,” says Morningstar equity analyst Burkett Huey, pointing out, many programs are procured and sustained over decades. He appraises the stocks fair value to be US$433.