Four cheap U.S. stocks that are winning

The largest U.S. private health insurance provider, UnitedHealth Group (UNH) offers medical benefits to nearly 50 million members in the U.S. and globally. Thanks to its unrivalled scale, the company is uniquely positioned in the healthcare sector, particularly in the managed-care industry.

Morningstar recently upgraded United’s moat rating to wide “driven by the cost advantages and network effects embedded within the largest private health insurance organization nationwide,” says a Morningstar equity report.

“Scale is the thread that connects its different businesses and drives the competitive advantages that allow the company to earn excess returns over time,” says Morningstar equity analyst, Jake Strole, who recently raised the stock’s fair value from US$218 to US$300, largely driven by the moat upgrade and more optimistic longer-term assumptions.

The company’s strategic investments -- acquisitions, a top health analytics product, and improving the transparency of its medical benefits -- have enabled it to remain at the leading edge of changes affecting the industry. “We expect the company to maintain its leadership position through continued product innovation while pursuing acquisition opportunities that add competencies to the enterprise,” says Strole.

Compass Minerals (CMP) produces salt used for deicing, and sulfate of potash, a specialty fertilizer. The company’s main assets include rock salt mines in Ontario, Louisiana, and the U.K. and salt brine operations in Utah.

Compass Minerals holds an enviable portfolio of cost-advantaged assets. Its salt mine in Ontario benefits from unique geology, with proximity to a deep-water port allowing it easy water-based access to snowy markets. Additionally, the company’s Great Salt Lake mine, one of only three naturally occurring brine sources, produces sulfate of potash (SOP), a specialty fertilizer used by growers of high-value crops, at a significantly lower cost than producers that use a chemical process, according to a Morningstar equity report.

These unique assets have geological advantages that are nearly impossible to replicate, affording the wide-moat Compass “a sustainable cost advantage over other producers of both salt and SOP,” says Morningstar equity analyst, Seth Goldstein, who pegs the stock’s fair value at US$81.

Proximity to ports allows Compass speed and a significant cost advantage as mines close to waterways can typically deliver deicing salt to customers at a lower cost than competitors, says Goldstein, pointing out that water transport costs “about half the cost of rail and one fifth the cost of trucking.”

King of the hill in the snack market, Kellogg (K) makes and markets cereal, cookies, crackers, and other packaged foods across 180 countries. Its brand portfolio includes such household names as Special K, Frosted Flakes, Froot Loops, Rice Krispies, Pop-Tarts, Eggo, Kashi, Pringles, and Morningstar Farms. A third of its sales come from international markets.

With more than one third share of the domestic cereal aisle, and a dominant position in the on-trend snacking category (more than half of its total sales), Kellogg is a valued partner for retailers. “The firm boasts five brands that generate more than US$1 billion in annual sales and another five that generate sales of US$500 million-US$1 billion each year that help drive traffic into retail outlets,” says a Morningstar equity report.

The firm’s sustainable competitive advantage is built on dominant market position, relationship with retailers and a panoply of resources. As competition intensifies, “the strength of Kellogg’s relationships with its retail partners should ultimately ensure its edge persists longer term,” says Morningstar sector director, Erin Lash, who forecasts the firm to generate returns above its cost of capital over the next two decades. Her US$78 fair value estimate puts the stocks at “a 25% discount,” and when combined with its 4% annual dividend yield, makes it “a compelling bargain.”

Cardinal Health (CAH) is a major distributor of pharmaceuticals and medical supplies to pharmacies and hospitals and a leading logistical partner for many branded manufacturers.

“Cardinal Health plays an important role within the healthcare market,” says a Morningstar report, noting that it is “able to turn its significant size and market share into key competitive advantages.” The firm’s entrenched position within the pharmaceutical industry should provide a solid platform for its continued success, as the use of pharmaceuticals increases over the next several years, the report says.

As the third-largest pharmaceutical distributor by revenue and the main supplier to CVS Health’s retail pharmacy operations, Cardinal possesses a wide moat. The bulk of US$400 retail pharmaceutical spending in the U.S. flows through the operations of the major three pharmaceutical distributors, including Cardinal, according to the Centers for Medicare and Medicaid Services. “This dominance drives robust and sustainable economic profits for these players,” says Morningstar sector director, Damien Conover, who puts the stock’s fair value at US$82.