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Are Stocks Cheap or Expensive Right Now?

Nearly three-quarters of Canadian stocks in our coverage universe are on deep discounts.

Andrew Willis and Fernando Luque 14 December, 2022 | 4:55AM
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Star ratings

At Morningstar, we calculate the Price to Fair Value (P/FV) of the world's most important stocks using the Morningstar Fair Value Estimate. Based on these estimations we can deduce whether a given stock is expensive or cheap. If the P/FV of a stock is above 1, it is considered overvalued; if the P/FV is below 1, it is considered undervalued.

Another way to assess whether stocks are expensive, cheap or correctly valued is through the Morningstar Rating for Stocks, which has an advantage over the P/FV in that it incorporates a level of uncertainty in the estimations. Two companies can have a very similar P/FV, but that does not necessarily translate into the same Morningstar rating. 

Therefore, looking at the number of stocks getting 4 and 5 stars (stocks considered as a buy-in green in the chart below) and the number of stocks with 1 or 2 stars (considered as a sell - in red) can find a better clue as to whether the stock market is cheap or expensive.

Is the Stock Market Cheap or Expensive Right Now?

November was a good month for stocks. The Morningstar Global Markets index, which reflects the performance of world stock markets, gained 6.82%.

Last month, the percentage of stocks with 4 or 5 stars across our entire database (1,441 companies covered by our team of equity analysts) suffered an important decline from 63% to 53%. We have to go back to August of this year to see a similar percentage (52%) in the number of 4- and 5-star stocks.

Regarding the stocks with 1 or 2 stars, the percentage has increased from last month passing from 12% to 16%. In general, we can say that, based on that numbers, the market is still relatively cheap for 2023.

Apart from finding out whether the market is cheap or expensive at the current level, the analysis of the stock ratings can help us put the valuations in perspective.

How Do Canadian Stocks Compare?

If we compare the ratings between the United States and Canada, we can that stocks are more undervalued Up North. In Canada, with 72% of stocks in our coverage universe are trading in the 4 and 5-star range, compared to 47% in the U.S.

How Do Different Sectors Compare?

When comparing sectors, we can see that financial and healthcare stocks are the cheapest, with the most 4 and 5-star stocks in Canada right now.

Canada's most expensive sectors right now are industrial and consumer defensives with the majority of 1 and 2 star stocks.

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About Author

Andrew Willis and Fernando Luque  are senior editors of Morningstar Canada and Morningstar Spain.

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