Text丨Li Jian
Editor丨Li Zhuang
Morningstar, the world's largest index provider, recently held a second-quarter U.S. stock strategy meeting, showing the list of four-star and five-star stocks rated by Morningstar. These include companies such as Kraft Heinz, Under Armour, and Adobe that have performed well but have been suppressed by negative market sentiment.
At the conference, Morningstar's chief U.S. market strategist and head of U.S. economy gave his views on the economy and market hot spots. Morningstar believes that although GDP growth in 2023 will exceed expectations, the economic performance in 2024 may not be as good as last year.
The list of recommended stocks for the second quarter was announced
Dow、Adobe位列其中
Dave Sekera, chief U.S. market strategist at Morningstar, said that the U.S. CPI data released on the 10th brought a lot of new news, and he expects that in the second half of this year, as the Fed begins to cut interest rates in June, interest rates across the yield curve should start to fall, and long-term interest rates are also expected to fall.
Morningstar believes that the U.S. economy is likely to slow down in the coming quarters, which will affect the performance growth of technology companies this year.
The momentum driving the upward movement in the U.S. stock market in the first quarter was related to AI stocks, but many trends may reverse in the coming quarters. Dave believes, "Again, the least popular industry is the one with the most opportunities." ”
Dave noted that right now, the sector with the worst sentiment in the market is real estate, with the average share price trading at a discount of about 11% to fair value. In addition, the utilities sector also traded at a significant discount to fair value in the third quarter of 2023 when its share price plummeted due to rising interest rates. Mid-cap and small-cap stocks are also currently undervalued compared to large-cap stocks. This is the first time since late 2010 that there has been a significant divergence between large and mid caps. Over time, Dave expects those divergences to heal.
In addition, valuations in the energy sector are within reasonable ranges. However, even with reasonable valuations, energy stocks can still serve as a natural hedge in a portfolio, hedging against additional geopolitical and inflation risks.
Compared with these industries and sectors with discounted stock prices, Morningstar estimates that the premium rate of the technology sector is currently as high as 8%, which has entered the overvalued area. Dave said, "You don't have to sell all your positions in tech stocks. Alphabet's share price is still a bit undervalued, at a discount of about 10% to 12% to fair value. ”
In addition, according to Morningstar's calculations, the current valuation of the industrial sector is relatively high, especially represented by aviation stocks and transportation stocks, which are significantly overvalued.
Dave attaches a list of newly selected companies for the second quarter, as follows:
Dow is a commodity chemicals company, and Dave bluntly said that this is the best target at the moment, because the demand for commodity chemicals will recover significantly, and the market has a lot of room for expansion.
In the table, Uder Amour's performance is turning a profit, with new management on the horizon and many new products to be launched in the coming years.
MarketAxess Holdings is an interesting company that is an online bond trading platform specializing in institutional investors. Last year, the company issued fewer new bonds, which led to a decline in trading volume on their platform. But this year, as issuance returns to average, the company's share price will have an upside opportunity.
"Finally, Bank of America is on our list again. "Bank of America has been one of our best options in the U.S. regional banking sector since the problems with Silicon Valley Bank early last year," Dave said.
In addition, Adobe is also one of Dave's more optimistic companies. "Adobe's share price is at a significant discount, with a fair value discount of about 18%, making it a four-star Morningstar stock. It is currently considered one of the few large tech stocks that we currently consider to be undervalued. ”
Kraft Heinz is also a target company on this list. Dave noted, "In the defensive consumer industry, a lot of companies are already very expensive. But in the food industry, there are still some companies that are undervalued due to the negative sentiment in the market. ”
U.S. economic growth is likely to slow down in the coming quarters
Make sure you have an adequate margin of safety
On the issue of equity valuations, Dave noted that "Wide-moat stocks have outperformed so far this year, with the Morningstar Wide-Moat Composite Index outperforming the broader market." ”
But along with that, wide moat stocks are slightly more expensive as a result. It's hard to find large-cap and mid-cap stocks with wide moats and prices that are significantly below intrinsic value. As a result, Morningstar expanded its stock selection this quarter with a number of new additions.
"Specifically, we screen out stocks with low or medium uncertainty and then rank them from the most undervalued to the reasonably highest. There are two new companies on the list – Nike and Starbucks. These two companies have a long-term competitive advantage, and the low valuation given to them by the market is unreasonable. ”
"A lot of times, the market is like a pendulum that swings too much down or up, and in our opinion, it's in the stage where it swings too much upward. ”
However, for companies that have not had a competitive advantage for a long time, they should be carefully observed before deciding. Dave said that as economic growth is likely to slow in the coming quarters, it is important to make sure there is an adequate margin of safety when investing in these companies.
U.S. GDP growth in 2025 may be only 1.44%
The federal funds rate is expected to fall by 300 basis points by 2026
U.S. economic data showed that inflation was sticky, with core CPI rising 3.5% year-on-year in March, compared with 3.2% in the previous month, exceeding expectations for three consecutive months. The market is worried that inflationary pressures have spread to all corners of the US economy, so the Fed's timetable for cutting interest rates this year may be delayed.
In this regard, Preston Caldwell, head of US economics at Morningstar, believes that the market and media have overreacted, and if the year-on-year growth of core CPI in March slows slightly to 3.4%, then rounding up to about 3%, there will be no such big worry. Therefore, investors should be wary of these figures.
Caldwell noted that, in fact, the core PCE price index is a better indicator and the Fed's preferred index for choosing whether to make interest rate adjustments. Core PCE is likely to be more modest in March, in the range of 2%-2.5%. While slightly above the expected annualized inflation rate of 2%, it is already less worrisome.
"With the release of the March PCE inflation rate at 8:30 a.m. ET on April 26, we will have a better understanding of what is actually happening on core PCE, and based on these data, we expect that the probability of a Fed rate cut in June remains high. I think even if the Fed is talking hawkish right now, they will be flexible to adjust. Judging by their voices last year, once inflation is well under control, it will quickly turn in a more dovish direction. Caldwell said.
Over the past few years, the Fed has raised interest rates by the most in 40 years, but GDP growth has shown to be resilient. Real GDP growth improved in 2023 compared to 2022 and accelerated in the second half of the year, but Caldwell believes that growth will start to slow. Looking at the annualized rate data, the real growth rate in 2025 may only be 1.44%, falling to the bottom. After that, growth will re-accelerate in 2026-2028 as the Fed cuts interest rates.
Caldwell stressed that it is important to note that the potential growth rate of the US economy is now likely to be between 2.5% and 3% (the Fed forecasts 2.1%) due to strong labor supply and productivity gains, which means that when GDP growth slows to 1.4% by 2025, it will create deflationary pressures.
"In any case, we expect the federal funds rate (the benchmark for short-term interest rates) to be significantly lower over the next three years, with a projected decline of about 300 basis points by the second half of 2026. Caldwell noted.
Here is an excerpt from the Morningstar Q&A:
You can look for companies that have a clear plan for AI in their financial reports
Q: What is Morningstar's current rating and view on the outlook for gold?
A: There are actually two parts to answering this question. The first part is that we are now using US$2,300 per ounce as our short-term outlook model for gold miners. This $2,300 is very close to the spot price of gold.
However, we are bearish on the long-term gold price. Based on the long-term supply and demand analysis we have done, our analysis team believes that the long-term gold price should be around US$1,700 per ounce.
The second part is that, despite our bearish long-term outlook on the gold price, the gold miners shares themselves are significantly undervalued, with stocks such as Barrick Gold and Newmont Mining being four-star stocks with a considerable discount to fair value.
In the current gold boom, if the gold price continues to remain high or moves higher, I think there is a lot of room for gold mining companies to upside in their share prices. Over the past few years, the market has been very pessimistic about gold miners, and we believe that is starting to change. So we think there's a lot of upside momentum for these stocks in the short term, and we're going to be racing against time soon.
Q: If Trump is elected president, will it change your forecasts for things like economic growth and inflation?
A: We don't know which one will win the presidency in the end, but we expect a split in Congress to be more likely. Whoever wins the election, I don't think we're going to see a huge change in policy and budget with Congress divided.
Q: Is there still a chance for AI or technology-related stocks in the long term?
A: Valuations of stocks related to these areas are highly inflated, and they are currently in one- and two-star positions in the Morningstar ratings. And we have to remember that when something is adequately valued, it doesn't mean that it's overvalued, but it means, that it's trading at its intrinsic valuation, and long-term investors should earn their cost of equity over time.
So, based on valuations, I would be underweight stocks in the technology sector. But I'll look for companies that have a clear plan and focus on that one in the next few weeks of the earnings season.
We're looking for companies that have real specifics that can show how to scale production in the AI space. As for how AI can really help them increase their revenue, or how it can help them become more efficient and improve their operating margins, I need to see a concrete plan to have confidence in the company.
It is undeniable that many companies are currently looking to join AI games, but in reality they don't really have the strength. I believe that companies with clear R&D and production plans will have more opportunities.
(The article only represents the author's point of view and does not represent the position of this journal.) ）