Investors have endured a lot of market uncertainty during 2022 so far. The market faces several risks today, including inflation, rising interest rates, and geopolitical risk. Both the stock and bond markets are suffering losses.
During uncertain times, investors may want to own companies that offer some sense of certainty in terms of cash flows and company fundamentals. That’s where Morningstar’s Best Companies to Own list comes in. The companies that make up this list–126 in total–have significant competitive advantages, and we think those advantages are stable or growing. We believe the best companies have predictable cash flows and are run by management teams that have a history of making smart capital allocation decisions.
But the best firms aren’t always the best stocks to buy at a given point in time. How much an investor pays to own a company–best or otherwise–is important, too. So here we’re focusing on the 10 best companies with the most undervalued stock prices today.
The 10 Best Stocks as of June 2022
The 10 most undervalued stocks from our Best Companies to Own list at the start of June are:
- Salesforce.com (CRM)
- Yum China (YUMC)
- Taiwan Semiconductor Manufacturing (TSM)
- Veeva Systems (VEEV)
- Equifax (EFX)
- Anheuser-Busch InBev SA/NV ADR (BUD)
- Guidewire Software (GWRE)
- ServiceNow (NOW)
- Tyler Technologies (TYL)
- Adobe (ADBE)
Here’s a little bit about why we like each of these companies at these prices, along with some key Morningstar metrics. All data is as of May 31, 2022.
Salesforce
- Price/fair value: 0.50
- Fair value uncertainty: Medium
- Moat Trend: Positive
- Capital Allocation Rating: Standard
- Industry: Software – Application
Salesforce hasn’t been immune to the drubbing the technology sector has experienced this year. While the enterprise cloud computing solution provider likely faces a dip in revenue growth below 20% at some point in the next few years, we think ongoing margin expansion will provide compound earnings growth of more than 20% for much longer. Salesforce has assembled a front-office empire it can build on for years to come, says Morningstar senior equity analyst Dan Romanoff. We expect the firm to continue to benefit from cross-selling and upselling, pricing actions, international growth, and continued acquisitions. “We believe Salesforce represents one of the best long-term growth stories in software,” he concludes. Salesforce stock is 50% undervalued by our measures.
- Price/fair value: 0.53
- Fair value uncertainty: Medium
- Moat Trend: Stable
- Capital Allocation Rating: Standard
- Industry: Restaurants
Although the resurgence in coronavirus cases has put pressure on the Chinese restaurant sector, we think Yum China, the largest restaurant chain in China, is being unduly punished: Yum China stock is 47% undervalued relative to our fair value estimate of US$86.00. Morningstar senior analyst Ivan Su argues that there’s reason to be confident about restaurants such as Yum China (whose brands include KFC, Pizza Hut, and Taco Bell, among others) that have the scale to be aggressive on pricing in the near term; that provide customers greater access via robust digital ordering, delivery, and drive-through options; and that boast healthy balance sheets.
Taiwan Semiconductor Manufacturing
- Price/fair value: 0.56
- Fair value uncertainty: Medium
- Moat Trend: Stable
- Capital Allocation Rating: Exemplary
- Industry: Semiconductors
The stock of the world’s largest dedicated contract chip manufacturer, TSMC, has struggled this year, owing to macroeconomic uncertainty and a sluggish smartphone outlook. However, we think these headwinds have provided an enticing entry point for stock investors: TSMC’s stock trades 44% below our fair value estimate of US$17. We foresee high-performance computing demand as the biggest growth driver in the next five years, says Morningstar analyst Phelix Lee—plus industrial and automotive demand remains strong despite a lukewarm consumer outlook. We don’t expect equipment deliveries to hurt our five-year revenue compound annual growth rate of 16.5%, he adds.
- Price/fair value: 0.62
- Fair value uncertainty: Medium
- Moat Trend: Positive
- Capital Allocation Rating: Standard
- Industry: Health Information Services
Veeva is the leading provider of cloud-based software solutions in the life sciences industry. Given its tech-leaning business, Veeva stock has gotten beaten down in 2022 and is about 38% undervalued relative to our US$275 fair value estimate. We like the stock at this price, given the company’s strong retention rates, continued development of new applications, increasing penetration with existing customers, addition of new customers, and expansion opportunities outside of life sciences, says Morningstar analyst Dylan Finley. We think the company can extend its market leadership, and we therefore award the company a positive Morningstar Moat Trend Rating.
- Price/fair value: 0.63
- Fair value uncertainty: Medium
- Moat Trend: Stable
- Capital Allocation Rating: Exemplary
- Industry: Consulting Services
One of the leading credit bureaus in the United States, Equifax faces strong headwinds today as mortgage market weakness—and a subsequent decline in mortgage credit inquires—takes a toll. We nevertheless think the market is being overly harsh: Equifax stock trades 37% below our US$325 fair value estimate. In fact, we think Equifax’s Workforce Solutions segment is differentiated and growing at a healthy clip, says Morningstar analyst Rajiv Bhatia—and we think the segment’s fundamentals are strong. It’s now Equifax’s largest segment.
- Price/fair value: 0.63
- Fair value uncertainty: Medium
- Moat Trend: Stable
- Capital Allocation Rating: Exemplary
- Industry: Beverages – Brewers
Brewer Anheuser-Busch InBev has a vast global scale and regional density. The company has a history of buying brands with promising growth platforms and then expanding distribution while ruthlessly squeezing costs from the businesses, which contributes to the company’s exemplary Morningstar Capital Allocation Rating. “AB InBev has one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators,” says Morningstar director Philip Gorham. We think the market has underappreciated AB InBev stock for a long while: The stock trades 37% below our fair value estimate of US$90.
- Price/fair value: 0.63
- Fair value uncertainty: Medium
- Moat Trend: Positive
- Capital Allocation Rating: Standard
- Industry: Software - Application
Another victim of 2022′s tech-stock selloff, Guidewire stock is undervalued by about 37%. Guidewire provides software solutions for property and casualty insurers. Guidewire’s modern software platform has disrupted a sleepy industry that has been underserved by legacy software vendors, says Morningstar senior analyst Dan Romanoff. As the industry can no longer wait nor afford to maintain legacy systems, we see a long runway for additional growth, he adds. We’ve therefore awarded Guidewire a positive Morningstar Moat Trend Rating.
- Price/fair value: 0.67
- Fair value uncertainty: Medium
- Moat Trend: Positive
- Capital Allocation Rating: Exemplary
- Industry: Software - Application
ServiceNow stock trades about 33% below our fair value estimate of US$700 today. The company built a best-of-breed software as a service solution for IT service management, then branched out into IT operations management, and has since moved beyond the IT function to become an indispensable solution, explains Morningstar senior analyst Dan Romanoff. ServiceNow has earned a wide Morningstar Economic Moat Rating due to high switching costs—after all, switching software platforms involves time and money and bears operational risk, he adds. And we think ServiceNow’s moat is only growing: “Not only are customers renewing; they are also signing significantly larger deals,” he adds.
- Price/fair value: 0.67
- Fair value uncertainty: Medium
- Moat Trend: Stable
- Capital Allocation Rating: Standard
- Industry: Software – Application
Like other software stocks on this list, Tyler Technologies stock has gotten knocked for a loop this year. The stock is undervalued, trading 33% below our $530 fair value estimate. The company, which is the leader in the nice government operational software market, posted strong first-quarter results, seeing momentum in its software subscriptions and transactional revenue. We think there’s a decade-long runway to growth at Tyler, as the push for local governments to modernize their legacy enterprise resource planning systems intensifies, argues Morningstar senior analyst Dan Romanoff.
- Price/fair value: 0.68
- Fair value uncertainty: Medium
- Moat Trend: Stable
- Capital Allocation Rating: Exemplary
- Industry: Software – Infrastructure
Adobe stock is undervalued by about 32% after spending much of 2021 looking overvalued by our metrics. Adobe is a leader in content creation software thanks to its Photoshop and Illustrator solutions, both of which appear in the broader subscription-based Creative Cloud. Although some investors appear concerned about competition at the low end, we think Adobe’s dominance is unencumbered, says Morningstar senior analyst Dan Romanoff. Recent price increases make sense, we think, given the company’s expanding portfolio.
The Best Companies to Own in 2022
You can review all of the companies on our Best Companies to Own list and dig into our methodology, which includes definitions for the key Morningstar metrics included in this article. Those with specific interests can drill down with our Best International Companies to Own, Best Sustainable Companies to Own, or Best Innovative Companies to Own lists, too.
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