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Bargains Still Exist--Even in This Market

Here are three growth stocks that we think are attractively priced.

Haywood Kelly, 11/14/2006

Morningstar's 100 stock analysts cover 1,800 companies. Their full analyst reports are available through Morningstar Principia Stocks Advanced and Morningstar Advisor Workstation Office Edition.

Since we launched the Morningstar Rating for stocks in 2001, there have been three extended periods when we thought stocks in general were bargains: immediately after 9/11, the period from the spring of 2002 to the spring of 2003, and, most recently, the middle months of 2006.

This third period was the least extreme of the bunch--the median stock we cover was 4% undervalued in July, which is hardly something to get excited about--and it appears to have come to a close. The median price/fair-value ratio of our coverage universe now stands at 1.03, meaning that the median stock we cover is 3% overvalued, in our view. The number of stocks with 5-star ratings--our highest rating--has dropped to less than 100, which is only 5% of our coverage universe.

Where have all the 5-star stocks gone? To a large extent, the stocks of high-quality companies have appreciated nicely. Many of the stocks that have long dominated the 5-star list are no longer there, including Wrigley WWY, Johnson & Johnson JNJ, and CarMax KMX. Even Coca-Cola KO, which had been 5 stars for more than two years running, has appreciated enough to shed a star.

What's an Investor to Do?
We're not fans of making wholesale shifts in and out of the market based on overall stock-market valuations. But we do advocate regularly rebalancing portfolios to make sure it doesn't drift away from you. One reason we're skeptical of shifting money wholesale in and out of the market is that there's usually something out there that's attractively priced. Even if the vast majority of stocks we cover don't look particularly interesting right now, there are still around 100 5-star stocks, after all.

And many of those belong to high-quality companies. As you can see in the table below, although wide-moat stocks trade at a price/fair value that's at a 52-week high, they're still the cheapest group.

 Price/Fair Value Estimate by Moat Rating

Price/Fair Value

Morningstar Coverage Universe
Wide Moat
Narrow Moat
No Moat
Data as of 11-06-06

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