3 Overlooked High-Quality Stocks

Today we're looking at three high-quality stocks that our analysts like.

Investor sentiment on wide-moat Bank of New York Mellon has soured, and as a result, it trades at a larger discount to our fair value estimate compared to other pure-play custodian banks. BNY Mellon and the custody banks in general do face headwinds, but we think it's important not to overstate the negatives. Though low interest rates will weigh on the firm, most of its revenue is fee-based, and its conservative balance sheet means the firm has only low credit risk. We believe there are pockets of growth for BNY Mellon, notably its Pershing business. In addition, compared with State Street and Northern Trust, BNY Mellon is more diversified and has less exposure to equity market movements. As a result, we believe shares of BNY Mellon present an attractive risk/reward profile.

We see attractive upside in SQM, which has carved out a narrow economic moat from its cost-advantaged lithium, iodine, and specialty fertilizer production. Longer term, we view lithium as one of the best ways to play increasing electric vehicle adoption because lithium is needed in all EV batteries regardless of auto brand or battery chemistry. As one of the lowest-cost lithium producers globally, SQM should benefit from greater EV adoption. Eventually, we expect lithium will be SQM's most important business, generating roughly 70% of companywide profits. In the wake of falling demand in 2020, nearly all major lithium producers are likely to reduce current production. As demand growth returns in 2021, however, we expect the market to return to balance by the end of the year and prices to rise meaningfully during 2022 to our long-term forecast of $12,000 per metric ton.

Lastly, our analysts like wide-moat Wells Fargo. Admittedly, Wells comes with a lot of baggage, which is one reason we believe the stock is so cheap. It's still in turnaround mode, is recovering from a bad culture that pervaded the consumer group and upper management, is still subject to serious consent orders from regulators, and has had its profits hit harder than most during the downturn. However, the valuation is extremely undemanding. Wells would have to become and stay the worst bank under our U.S. coverage forever for today's valuation to make sense. Specifically, we estimate that the bank would have to struggle to meet its cost of equity of 9% indefinitely, make essentially no progress on the expense front compared with where it was even in the middle of its regulatory fallout, and see core net income impaired by 25% to 40% longer term compared with where it was between 2014 and 2019. We think the odds are in Wells' favor to outperform these expectations. That being said, predicting the timing of a turnaround remains extremely difficult. Wells is therefore a longer-term idea with unique risks.

Analyst Rajiv Bhatia and senior analysts Seth Goldstein and Eric Compton provided the research behind this segment.