After a tough 2022, growth stocks have had a sizable performance advantage over value stocks so far this year: The Morningstar US Growth Index has outperformed the Morningstar US Value Index by more than 15 full percentage points through mid-May 2023.
Are growth stocks still the screaming bargains they were heading into 2023? Nope, says Morningstar senior U.S. market strategist Dave Sekera. “While we still see an overweight opportunity in the value category, which trades at a 15% discount, it is now time to move to a market-weight position in growth from overweight as the category now trades in line with the broad market,” he says. From a price perspective, value stocks look like the better long-term investment today.
We’ve put together a list of the best value stocks to buy for the long term, using these criteria:
- The stocks land in the value portion of the Morningstar Style Box.
- The stocks are from U.S. companies included on Morningstar’s list of the Best Companies to Own for 2023. Companies on this list have wide Morningstar Economic Moat Ratings that are stable or growing and predictable cash flows, and they are run by management teams that make smart capital-allocation decisions.
- The stocks are cheap, which means they’re trading below their fair value estimates.
10 Value Stocks to Buy for the Long Term
The 10 cheapest U.S. value stocks from Morningstar’s Best Companies to Own list as of May 12, 2023, were:
- U.S. Bancorp USB
- Wells Fargo WFC
- Comcast CMCSA
- Bank of America BAC
- Pfizer PFE
- Medtronic MDT
- Gilead Sciences GILD
- Northern Trust NTRS
- Cisco Systems CSCO
- CME Group CME
Here’s a little bit about each of these value stocks for the long term. Data is as of May 12.
U.S. Bancorp
- Price/Fair Value: 0.55
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Large Value
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Banks—Regional
It’s not surprising that U.S. Bancorp tops our list of the best value stocks to buy for the long term, given that the banking crisis has pummeled regional bank stocks during the past several weeks. But we think that the bank stock selloff went too far. In fact, U.S. Bancorp is one of the most profitable regional banks we cover, says Morningstar strategist Eric Compton. After U.S. Bancorp reported earnings, Compton noted that the bank’s deposit base and funding costs were tracking as we’d expected. U.S. Bancorp stock trades 45% below our fair value estimate of US$53.
Wells Fargo
- Price/Fair Value: 0.65
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Large Value
- Morningstar Capital Allocation Rating: Standard
- Industry: Banks—Diversified
Like the other banks on this list of cheap value stocks to buy, Wells Fargo has taken it on the chin as the regional banking crisis has unfolded. But Wells Fargo isn’t a regional bank; in fact, it remains one of the top deposit gatherers in the United States behind JPMorgan Chase JPM and Bank of America BAC. The bank beat first-quarter estimates, and deposits slipped modestly. However, the bank is in the midst of a multiyear rebuild, with years of expense-saving-related projects ahead and additional investment in its existing franchises, says Morningstar’s Compton. The bank also has a sizable presence in the middle-market commercial space and boasts a large advisor network, which support its wide economic moat rating. Wells Fargo stock is undervalued and trades 35% below our fair value estimate of US$58.
Comcast
- Price/Fair Value: 0.67
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Large Value
- Morningstar Capital Allocation Rating: Standard
- Industry: Telecom Services
Growth in Comcast’s cable business has slowed, and we expect it to continue to slow as more customers access fiber and wireless network alternatives. We nevertheless think Comcast will be able to limit broadband share losses in the coming years while enjoying solid pricing power, says Morningstar director Mike Hodel. NBCUniversal is more challenged, however, though we do like the idea of expanding the theme park business around key content franchises, Hodel adds. A solid balance sheet has allowed Comcast to aggressively repurchase shares and pay decent dividends. Comcast is a cheap value stock to buy for the long term, trading 33% below our fair value estimate of US$60.
Bank of America
- Price/Fair Value: 0.73
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Large Value
- Morningstar Capital Allocation Rating: Standard
- Industry: Banks—Diversified
Bank of America stock trades 27% below our fair value estimate. Considered to be one of the preeminent banking franchises today, Bank of America has one of the best retail branch networks and overall retail franchises in the U.S., is a leading investment bank and a top-four U.S. credit card issuer, and owns the Merrill Lynch franchise, notes Morningstar’s Compton. The bank announced decent first-quarter earnings, with its deposit base and funding costs coming in as expected. And during Berkshire Hathaway’s annual meeting, Warren Buffett confirmed his support of the bank; Berkshire owns about 13% of the bank’s shares. We think Bank of America stock is cheap and worth US$37 per share.
Pfizer
- Price/Fair Value: 0.78
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Large Value
- Morningstar Capital Allocation Rating: Standard
- Industry: Drug Manufacturers—General
Pfizer is the first stock on our list of the best value stocks to buy for the long term from a sector that most don’t associate with value: healthcare. But like many Big Pharma stocks, Pfizer lands in the value portion of the style box. We don’t think the market fully appreciates the pharmaceutical giant’s ability to offset major patent losses over the next five years, argues Morningstar director Damien Conover. We’re most bullish on several near-term launches, including the respiratory syncytial virus vaccine and immunology drugs ritlecitinib and etrasimod, says Conover. We think Pfizer stock is worth US$48 per share; the stock currently trades 22% below that.
Medtronic
- Price/Fair Value: 0.79
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Large Value
- Morningstar Capital Allocation Rating: Standard
- Industry: Medical Devices
Another cheap healthcare stock landing in the value portion of the style box, Medtronic stock trades 21% below our US$112 fair value. The largest pure-play medical-device maker is a key partner for its hospital customers, thanks to its diversified product portfolio aimed at a wide range of chronic diseases, explains Morningstar senior analyst Debbie Wang. Medtronic’s plans to spin off its patient monitoring and respiratory innovations businesses will only help the company pivot more toward faster-growing markets, she adds.
Gilead Sciences
- Price/Fair Value: 0.81
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Large Value
- Morningstar Capital Allocation Rating: Standard
- Industry: Drug Manufacturers—General
The second drugmaker on our best value stocks to buy list, Gilead Sciences stock is 19% undervalued relative to our fair value estimate of US$97. The company generates outstanding profit margins with its HIV and HCV portfolio, and its portfolio and pipeline support a wide economic moat rating, says Morningstar strategist Karen Andersen. In particular, we don’t think the market fully appreciates the drugmaker’s long-term opportunity in oncology, she adds. As such, it’s a cheap value stock today according to our metrics.
Northern Trust
- Price/Fair Value: 0.81
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Mid-Cap Value
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Asset Management
The only mid-cap stock on our list of cheap value stocks, Northern Trust stock is 19% undervalued relative to our fair value estimate. Northern Trust is a leading provider of wealth management, asset servicing, asset management, and banking to corporations, institutions, affluent families, and individuals. The firm’s wide economic moat rating is due in part to the stickiness of its client base. Morningstar analyst Rajiv Bhatia called Northern Trust’s first-quarter results “OK,” as net interest income was lackluster and deposits declined. However, the banking turmoil is presenting an opportunity for the firm’s wealth business as clients leave troubled financial institutions. We assign Northern Trust stock a US$86 fair value estimate.
Cisco Systems
- Price/Fair Value: 0.83
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Large Value
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Communication Equipment
Another unlikely candidate for a list of the best value stocks to buy, Cisco stock is 17% undervalued relative to our US$56 fair value estimate. A dominant force in enterprise networking, Cisco is a leader in switching, routing, and wireless access that stands to benefit from trends toward hybrid work and hybrid cloud environments, argues Morningstar analyst William Kerwin. “Though Cisco faces greater competition in new models of networking, we expect it to retain its leadership as enterprises adopt hybrid and multicloud environments with new technologies,” he adds. While core markets offer slow and steady growth, newer software and cloud-centric businesses offer more upside for the company.
CME Group
- Price/Fair Value: 0.86
- Morningstar Uncertainty Rating: Medium
- Morningstar Style Box: Large Value
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Financial Data and Stock Exchanges
We close out our list of the 10 cheap value stocks to buy for the long term back in more familiar territory for value investors: the financial-services sector. CME Group stock is about 14% undervalued relative to our US$215 fair value estimate. Operating exchanges that allow investors to trade futures and derivatives, the company has benefited from higher interest rates and investor interest in the stock market, says Morningstar analyst Michael Miller. In fact, market volatility and higher fees led to strong first-quarter results for CME.
What Are the Morningstar Style Box and Fair Value Estimate?
The Morningstar Style Box is a nine-square grid that provides a graphical representation of the investment style of stocks, bonds, or funds. Based on a series of inputs—including a company’s historical and long-term projected growth and its historical and forward-looking price multiples—a stock is classified as either a value stock, a growth stock, or a core stock. A stock is also classified as either small-cap, mid-cap, or large-cap based on its market capitalization.
The fair value estimate, meanwhile, represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in the fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum.
