Uncertainty lingers over the stock market despite a promising start to 2024. Ongoing shifts in economic data and continued questions about Federal Reserve interest rate policy have made broad market predictions challenging. Within this environment, astute stock selection is more important than ever. David Sekera, chief market strategist at Morningstar, emphasizes the idea of a “stock picker’s market” – focusing on the fundamentals of individual companies rather than sweeping bets on sectors.
While investors seek stability, Sekera sees under-the-radar opportunities. He acknowledges that some sectors, like consumer staples, appear fully valued or overvalued. Yet, he identifies three picks outside the limelight as possessing significant potential:
Kraft Heinz (KHC): This well-known food company enjoys a five-star rating from Morningstar, suggesting the stock is trading below fair value. Despite a recent earnings slip with revenues below expectations, Sekera maintains optimism. He believes that as inflation pressures subside, Kraft Heinz can recover its profitability, boosting margins and making the current discount even more appealing, especially when coupled with their healthy dividend yield.
Medtronic (MDT): While healthcare overall may appear expensive, this leading med-tech company stands out, earning a four-star rating and sporting an attractive discount. Morningstar sees Medtronic as exceptionally well-positioned to benefit from the aging population trend. This translates to strong, long-term demand for its medical devices – a fundamental tailwind that may be underappreciated at its current stock price.
GSK (GSK): The significant discount given to this London-based healthcare giant comes with a word of caution. Sekera notes that the market may be exaggerating the threat of ongoing Zantac lawsuits. While legal uncertainty hangs over GSK, the Morningstar team feels Zantac litigation risks could be baked too heavily into the company’s share price, presenting a possible value opportunity if they get cleared up.
Words of Wisdom for Savvy Investors
Understand the trade-off: Undervalued picks often carry heightened risk and volatility compared to stable blue-chip companies. The potential for greater upside comes hand-in-hand with potentially sharper short-term price swings.
Don’t downplay litigation: GSK’s legal cloud surrounding Zantac remains a major risk factor. This uncertainty could continue to cast a shadow over the company, affecting both investors’ sentiment and long-term viability.
Research is your best friend: While analyst picks like these highlight interesting possibilities, they are only a starting point. Before allocating funds, it’s essential to undertake a deep dive into a company’s financial health, news, and its growth prospects to assess alignment with your own investment goals.
Think portfolio, not lone stock: Consider how these types of picks fit into your broader portfolio’s risk profile. Careful diversification remains vital, especially when investing in less predictable, smaller, or undervalued companies.
Navigating the murky waters of a volatile market can be fruitful, with opportunities arising for well-informed, meticulous investors. While broader market indicators offer valuable context, 2024 might reward those willing to roll up their sleeves and go beyond the headlines in search of individual companies with robust long-term prospects. These insights from Morningstar offer a valuable jump-off point, reminding us that sometimes, the most promising rewards come when we focus on companies, not just sectors.
