5 Stocks to Buy From the Best Money Managers

These undervalued stocks are popular with top-rated concentrated fund managers.

Susan Dziubinski 26 March, 2024 | 4:25AM
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Finding stocks to buy today—or, more precisely, finding undervalued stocks to buy today—isn’t getting any easier. According to Morningstar’s Market Fair Value estimate, stocks look more expensive than they have since the first quarter of 2022.

“Stocks are fully valued, and the market is starting to feel stretched,” says Morningstar chief U.S. market strategist Dave Sekera in his latest stock market outlook. As such, he thinks it’s especially important today to focus on stocks that are undervalued. “Overvalued stocks can always become more overvalued in the short run, but valuation will always win out in the long run,” he observes.

To find stocks to buy that are not just undervalued but that also hold promise, we turn to the portfolios of some of the best active managers running concentrated funds. These managers have confidence in their stock picks―and Morningstar has confidence in their stock-picking skills.

To isolate the best active concentrated fund managers, we screened on the following:

  • Actively managed funds that land in the U.S. large-value, U.S. large-blend, or U.S. large-growth Morningstar Categories.
  • Funds with at least one share class earning a Morningstar Medalist Rating of Gold with 100% analyst coverage.
  • Funds that hold 100 stocks or fewer as of their most recently reported portfolios.

 

Eleven separate fund portfolios passed our screen. We then ran a Stock Intersection report in Morningstar Direct to find undervalued stocks that were popular (as determined by portfolio concentration and number of funds that own the stock) across the funds.

5 Stocks to Buy From the Best Money Managers

These stocks are popular portfolio holdings among the best money managers and earn Morningstar Ratings of 4 or 5 stars, suggesting that they’re undervalued. Data is as of March 15, 2024.

  1. Alphabet GOOGL
  2. PepsiCo PEP
  3. Comcast CMCSA
  4. RTX RTX
  5. Medtronic MDT

Here’s a little bit about each stock to buy, along with some commentary from the analyst who follows the company. All data is as of March 15, 2024.

 

Alphabet

  • Number of best managers who own the stock: 6
  • Morningstar Rating for stocks: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Style Box: Large Core
  • Sector: Communications Services

Alphabet tops our list of stocks to buy from the best money managers. This wide-moat stock, which is trading 17% below our US$171 fair value estimate, is popular with both growth and value managers on our list. The stock has struggled during the past few months, weighed down by some artificial intelligence missteps and weakness in Google’s advertising technology business. But we don’t expect either to derail the company’s long-term potential, says Morningstar director Mike Hodel. Specifically, we’re forecasting a five-year compound annual growth rate of over 8% for total revenue and a five-year average operating margin of nearly 30%, he adds.

Alphabet dominates the online search market with 90%-plus global share (80%-plus US share) for Google, and the business generates very strong cash flow. We expect continuing search growth as we remain confident that Google will maintain its leadership despite Microsoft’s move to include generative artificial intelligence in Bing and Google’s recent AI missteps. We also foresee YouTube and cloud contributing more to the firm’s top and bottom lines.

Google’s ecosystem strengthens as its products are adopted by more users, making its online advertising services more attractive to advertisers and publishers. With its dominant share of queries globally, Google holds and continues to collect far more information regarding consumer behavior, in terms of both which results are most relevant for a given search term and the ads most likely to generate incremental sales. The firm utilizes technological innovation to improve the user experience in nearly all its Google offerings, while making the sale and purchase of ads efficient for publishers and advertisers. This innovation has included the use of AI in delivering search results. The introduction of generative AI adds some uncertainty, but we expect Google will ultimately use its information advantage to maintain its dominance. While the business is maturing, we think ad revenue can continue to grow at mid-single-digit rates in the coming years.

Among the firm’s investment areas, Google has quickly leveraged the technological expertise applied to its private cloud platform to expand into the public cloud business. The firm has increased its market share in this area, driving additional revenue growth and creating more operating leverage, which we expect will continue.

Most of Alphabet’s more futuristic projects are not yet generating revenue, but the upside is attractive if they succeed, as the firm is targeting newer markets. Alphabet’s autonomous car technology business, Waymo, is a good example: Based on various studies, it may tap into a market valued in the tens of billions of dollars within the next 10-15 years.

Mike Hodel, Morningstar director

 

PepsiCo

  • Number of best managers who own the stock: 5
  • Morningstar Rating for stocks: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Style Box: Large Core
  • Sector: Consumer Defensive

Pepsi is a top stock pick for five of our best managers; all of their funds land in Morningstar’s value or blend categories. The company’s most recent results were a mixed bag, and management issued a cautious outlook for 2024. We forecast the top line to grow at midsingle digits annually over the next 10 years, reports Morningstar analyst Dan Su. We see broad-based strength in the company’s snack revenue growth, while trends in the beverage business aren’t as strong. We think Pepsi stock is worth US$176.

Following years of anemic growth due to operational missteps and underinvestments, management has worked to right PepsiCo’s ship, even amid COVID-19-related disruptions and inflation. But we think there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth initiatives in select attractive beverage subcategories (such as energy drinks) and regional markets (Latin America, Africa, and Asia Pacific), and an integrated business model facilitating more effective commercialization.

Thanks to the strong snack and beverage brands underpinning close retail relationships combined with its massive scale and bargaining edge, we rate the firm as wide-moat and don’t foresee this position as wavering. For one, we see Pepsi’s convenient snack lineup as well placed to bolster its share by leveraging unrivalled brand awareness, operational scale, and retail relations. Within its beverage mix the firm is exploring a variety of options from nascent, in-house brands to brand licensing from third-party category leaders to expand its revenue base in nonsparkling categories, adding to its distribution clout and augmenting its carbonated drinks that have struggled thus far to narrow the gap with wide-moat Coca-Cola.

Demand for snacks and beverages tends to remain resilient throughout economic cycles, and a large end-to-end supply chain gives Pepsi better control over execution, helping to shield its operations from exogenous shocks. Risks and uncertainties abound, nonetheless, including inroads from e-commerce and hard discounters that introduce more competition and disrupts the pricing structure; consumption pattern shifts driven by health awareness; and cumbersome regulations and taxes that discourage the use of plastic packaging and the intake of sugar, sodium, and saturated fat. That said, a nimble and pragmatic approach, coupled with inherent brand prowess and manufacturing/distribution scale, should enable the firm to navigate the evolving competitive landscape while enhancing its returns.

Dan Su, Morningstar analyst

Comcast

  • Number of best managers who own the stock: 4
  • Morningstar Rating for stocks: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Style Box: Large Value
  • Sector: Communication Services

Trading 29% below Morningstar’s fair value estimate of US$60, Comcast is the most undervalued stock on our list. The four managers who own the stock all pursue value strategies. Morningstar’s Hodel calls pricing discipline “the most important factor driving Comcast’s performance”: The company has protected the value of its customer base by accepting modest customer losses while maintaining steady growth in revenue per customer. Comcast has a solid balance sheet and earns a wide economic moat rating based on the strength of its cable business.

Comcast’s core cable business enjoys significant competitive advantages but has seen growth slow as fixed-wireless offerings have provided a viable option for a subset of customers. NBCUniversal isn’t as well positioned but holds unique assets, including core content franchises and theme parks. We don’t love the firm’s strategy around Peacock, but we expect NBCU’s assets will play a significant role in the media landscape of the future. Overall, we expect Comcast will deliver only modest growth but with strong cash flow for the foreseeable future.

Comcast’s cable business has steadily gained broadband market share over its primary competitors, phone companies like AT&T and Verizon, as high-quality internet access has become a staple utility. We estimate the firm has increased broadband market share in the areas it serves to about 65% from 50% a decade prior, meaning Comcast’s customer base in the typical market area is twice the size of its rivals’. That gap is far larger in areas where the phone companies haven’t invested in recent years. With a network that can be upgraded at modest incremental cost, Comcast will remain the dominant broadband provider in many parts of the country and compete well in areas where the phone companies are building fiber, in our view. We also expect capacity limitations will ultimately constrain the number of broadband customers wireless carriers can serve. The high margins on internet access should offset the decline in the traditional television business, where margins have plunged in recent years.

Comcast has managed NBCU well over the past decade, but the TV business is rapidly evolving, which presents challenges. The effort to build the Peacock service to replace lost traditional TV revenue has developed slowly, creating uncertainty around the long-term prospects for the business. However, we like that the firm is aggressively expanding its parks business, creating experiences that leverage and support key content franchises. Sky adds distribution reach outside the United States, though the core Sky business faces a tough competitive environment.

Mike Hodel, Morningstar director



RTX Corp

  • Number of best managers who own the stock: 5
  • Morningstar Rating for Stocks: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Style Box: Large Value
  • Sector: Industrials

RTX is a top stock pick for five of the best money managers. Each of this diversified aerospace and defense company’s businesses—Collins Aerospace, Pratt & Whitney, and Raytheon—has carved out a wide economic moat, argues Morningstar analyst Nicolas Owens. While we don’t expect a final fiscal 2025 defense budget to be passed until after the November elections, we suspect the final budget will come in closer to 2% or more over fiscal 2024, which we view as neutral for the industry, says Owens. RTX stock trades 17% below our US$112 fair value estimate.

RTX’s businesses include Collins’ aerospace componentry and subassemblies, Pratt & Whitney’s engines, and Raytheon’s missiles, sensors, and communications offerings. The combined entity unites powerhouses in the commercial aerospace and defense contracting industries and is unique in its relatively even split between commercial and defense revenue; most other firms in the industry are heavily skewed one way or the other.

In commercial aerospace, Collins is one of the largest aircraft component and systems suppliers. We think its substantial scale gives it negotiating leverage with aircraft manufacturers, as it provides many systems and can selectively bid on critical components. Meanwhile, Pratt & Whitney is in the early innings of a long ramp-up of delivering thousands of the PW1000 family of geared turbofan, or GTF, jet engines, which power some of the popular Airbus A320neo and all A220 aircraft. With their long service life and the need for recurring overhauls, we see engines as well as some of Collins' aerospace component businesses as fitting the razor-and-blade business model, with the razors original equipment sale (sometimes at low or no margins) and the blades recurring servicing and parts revenue (including actual turbine blades), often at high margins. Pratt continues to service older V2500 engines that power many A320s in service today. We see long-term tailwinds for the GTF as we believe the A320 family will be the dominant narrow-body aircraft of this generation.

In defense, Raytheon provides missiles, missile defense systems, sensors, and secure communications almost exclusively to government agencies. We expect the military’s increased focus on modernizing its capabilities to drive material investment in each of these areas. We expect a flattening, rather than declining, budgetary environment as heightened geopolitical tensions are likely to buoy spending despite the potential debt burden. For these reasons, in addition to existing backlogs, we think Raytheon's businesses can continue growing despite a potentially slower overall macro environment.

Nicolas Owens, Morningstar analyst



Medtronic

  • Number of best managers who own the stock: 6
  • Morningstar Rating for stocks: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Style Box: Large Value
  • Sector: Healthcare

Medtronic rounds out our list of stocks to buy from the best money managers; six own the stock in their portfolios. One of the largest medical-device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases, and we think it has carved out a wide economic moat, says Morningstar senior analyst Debbie Wang. We expect the recent uptick in medical utilization following the pandemic to continue through fiscal 2024, she adds. Medtronic stock looks 25% undervalued.

Medtronic’s standing as the largest pure-play medical-device maker remains a force to be reckoned with in the medtech landscape. Pairing Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic’s position as a key partner for its hospital customers.

Medtronic has historically focused on innovation, designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes. All along, the firm has remained focused on its fundamental strategy of innovation. It is often first to market with new products and has invested heavily in internal research and development efforts as well as acquiring emerging technologies. However, in the postreform healthcare world where there are higher hurdles for securing reimbursement for next-generation technology, Medtronic has slightly shifted its strategy to include partnering more closely with its hospital clients by offering greater breadth of products and services to help hospitals operate more efficiently. By partnering more closely and integrating itself into more hospital operations, Medtronic is well positioned to take advantage of more business opportunities in the value-based reimbursement environment, in our view. In particular, Medtronic has been pioneering risk-based contracting around some of its cardiac and diabetes products, which we think is attractive to hospital clients and payers alike.

We have always appreciated Medtronic's diverse portfolio, where certain waning product lines would be offset by growth in other categories. Management has recently taken a more active role in pruning the product portfolio with the intent to ramp up growth. The COVID-19 disruption added more near-term turbulence, especially with supply chain issues and delays in nonpandemic patient volume, but we remain confident that underlying demand for many of these therapies and Medtronic's ongoing innovation should prevail over the longer term.

Debbie Wang, Morningstar senior analyst

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alphabet Inc Class A154.09 USD-1.23Rating
Comcast Corp Class A40.24 USD1.56Rating
Medtronic PLC79.48 USD0.37Rating
PepsiCo Inc174.13 USD1.08Rating
RTX Corp101.56 USD0.84Rating

About Author

Susan Dziubinski

Susan Dziubinski  is director of content for Morningstar.com.

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