2022 was a disastrous year for equities. The S&P 500 lost 20%, the Dow gave up nearly 9%, while the tech-heavy NASDAQ sank a staggering 33% to end the year. This makes 2022 the worst year since 2008 market rout. Moreover, stock market pundits are predicting more pain in 2023 before the tide starts to turn in the second half of the year.
Over the course of 2022, financial markets were hammered by stubbornly high inflation, tighter monetary policies, the war in Ukraine and mounting growing fears of global recession.
On the bright side, the bear market brought about a much-needed valuation reset that created some attractive entry points. This may be a good time for opportunistic investor to look at these three undervalued names in the Morningstar equity coverage universe.
CRISPR (CRSP) is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. The firm uses a revolutionary technology for precisely altering specific sequences of genomic DNA to treat genetically defined diseases. While the company does not yet have approved products, it provides long-term investors with pure play exposure to novel gene editing technology to treat severe, genetic diseases.
“The company's proprietary platform specializes in Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/Cas9, which precisely cuts DNA to disrupt, delete, correct, and insert genes to treat genetically defined diseases,” says a Morningstar equity report.
The company’s emerging technology has led to a new class of therapies targeting rare diseases or other disorders that are caused by genetic mutations.
CRISPR’s most advanced pipeline candidate, CTX001, in collaboration with Vertex Pharmaceuticals, targets sickle cell disease and transfusion-dependent beta-thalassemia, which have high unmet medical needs. “The company is progressing additional gene editing programs for immuno-oncology, as well as a stem cell-derived therapy for the treatment of Type 1 diabetes,” says Morningstar equity analyst Rachel Elfman, who puts the stock’s fair value at US$119.
Apparel maker Hanesbrands (HBI) sells basic and athletic wear in the Americas, Europe, and Asia-Pacific. The company sells to wholesale to discount, midmarket, and department store retailers as well as direct to consumers under brands including Hanes, Champion, Playtex, Maidenform, Bali, Berlei, and Bonds.
It produces more than 70% of its products in company-controlled factories in more than three dozen nations.
“Hanes’ key apparel brands have leading market share in their categories in the U.S. and a few other countries,” says a Morningstar equity report, pointing out that the brand’s popularity allows it to maintain strong retail distribution and premium pricing.
The company can generate returns on invested capital above its weighted average cost of capital over the next 10 years, the report adds.
Narrow-moat Hanesbrands’ basic innerwear (60% of its 2021 sales) holds market leadership in multiple countries.
“While the firm faces challenges from inflation, the strong U.S. dollar, lower inventory levels at retailers, and COVID-19, Hanes' share leadership in replenishment apparel categories puts it in better shape than some competitors,” asserts Morningstar equity analyst David Swartz, who recently lowered the stock’s fair value to US$22 from US$24, prompted by weaker than expected revenue in the third quarter of 2022.
Basic materials giant Compass Minerals (CMP) produces two primary products: salt and specialty potash fertilizer. The company owns rock salt mines in Ontario, Louisiana, and the U.K. and a salt brine operation in Utah. The company’s salt products are used for deicing and also by industrial and consumer end markets.
“Compass Minerals holds an enviable portfolio of cost-advantaged assets,” says a Morningstar equity report.
The firm’s rock salt mine in Ontario benefits from unique geology. With access to a deep-water port, it can deliver de-icing salt to customers at a lower cost than competitors. As well, Compass controls one of only three naturally occurring brine sources that produces the specialty fertilizer sulfate of potash, or SOP.
The majority of Compass' salt sales are to highway de-icing customers. Hence, its fortunes are closely tied to the number of snow days per season.
Based on Compass Minerals' fiscal fourth-quarter earnings call, Morningstar strategist Seth Goldstein says, the company's highway deicing salt bid strategy should successfully restore salt segment profits in 2023.
“Assuming normal winter weather, we forecast Compass Minerals will generate a little over $20 of EBITDA per metric ton sold in fiscal 2023, up from around $14.50 in fiscal 2022 and in line with the trailing 10-year average,” says Goldstein, who pegs the stock’s fair value at US$80, referring to current prices as “an excellent entry point for investors.”
