We’ve scoured the globe looking for the most undervalued stocks under Morningstar coverage. These companies are the cheapest of the 5-star stocks, the most extreme end of the Morningstar valuation scale.
China is very heavily represented among these stocks; of the 65 companies with a 5-star rating, 25 are Chinese. The Asian stock market is one of the worst performing in 2021, reversing a stellar 2020: last year the Morningstar China index rose a substantial 31%, but is down around 11% so far this year. The slide has intensified in recent weeks, with a fall of 13% in July alone, amid a crackdown on the country’s flagship tech sector, which has unnerved global investors.
China’s education firms have become the latest target of a regulatory squeeze from Beijing, outlawing private companies that teach the official school curriculum from making profits or even listing on the stock market. Companies like New Oriental Education & Technology and TAL Education have borne the brunt of this abrupt change, and the shares have now fallen around 90% in the year to date. Before Morningstar analyst placed the companies’ ratings under review, their shares were trading 80% below their fair value.
New Oriental and TAL would have been the cheapest companies in the world under Morningstar coverage, but that award now goes to TechnipFMC, whose shares trade at US$7, but have a fair value of US$25. Technip, which is listed in New York and Paris, provides engineering and construction services for the oil and gas industry. Analyst Preston Caldwell says the firm could benefit from consolidation in the sector. “We expect upstream oil & gas capital expenditure to mount a resounding recovery from Covid-19, as we don't think the pandemic will have a major long-run impact on oil demand,” he says.
Using the price/fair value ratio, investors can get an idea of where a company's share price stands in relation to its estinated fair price. For example, a P/FV ratio of 1 suggests a stock is perfectly fairly valued, whereas one with a ratio 0.50 is 50% undervalued.
Most Undervalued Stocks Under Morningstar Coverage
Two household names are also in the list of five most undervalued companies, and they are both in the automotive sector. Japan’s Nissan and France’s Renault are both trading more than 50% below their fair value, according to Morningstar estimates. The two companies are part of a wider Renault-Nissan-Mitsubishi alliance, which makes almost 8 million vehicles a year.
Why are shares in Nissan so depressed? “Nissan's recent performance has been dismal,” says Morningstar automitive expert Richard Hilgert, as the pandemic has slowed the company’s turnaround programme. Shares have fallen 43% in the past five years. High turnover of chief executives has not helped the recovery, he adds. Still, Nissan was one of the first car companies to build a powertrain for making all-electric vehicles, which gives it first-mover advantage.
The China education sector saga is a good reminder that these valuations change every day based on movements in the company’s share price, while Morningstar analysts also move their fair values up and down regularly, especially after financial results. As company prospects can change dramatically, particularly in dynamic emerging markets, our list of most undervalued stocks is likely to change on a daily and weekly basis.
