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The Opposite of GameStop

Three stable stocks to invest in to shield you from YOLO trades and FOMO frenzy.

The crowd-sourced short squeeze involving GameStop over the last couple of weeks has made sensational headlines across the globe. Fueled by Reddit traders and fanned by Twitter, the coordinated buying of the stock and the nearly 1,700% jump in the stock price in just two weeks have left many anxious investors feeling torn between FOMO (fear of missing out) and the fundamentals of investing.

An elaborately orchestrated short-squeeze stampede may temporarily create a price rally for the shorted stock, but it does nothing to change the fundamentals of a moribund company circling the drain. Not even when a section of the investing community puts a David versus Goliath spin on the trade.

Let’s save speculative shorts bets for the glitzy gambling pits of Vegas. For the hard-earned money of long-term investors, a far better bet would be these undervalued stocks with strong fundamentals, stable businesses, and sustainable competitive advantage that will keep rewarding shareholders long after the social-media-driven valuations of unfavored "meme" stocks have turned to dust. 

Kellogg (K)
Current yield: 3.87%
Forward P/E: 14.71
Price $58.94
Fair value: $82
Value: 28% discount
Morningstar Economic Moat Rating: Wide
Morningstar Moat Trend Rating: Negative
Morningstar Rating: 4 Stars

Data as of Jan. 29, 2021.

Leading packaged food manufacturer Kellogg makes cereal, cookies, crackers, and other snacks. Its portfolio of popular brands includes Special K, Frosted Flakes, Froot Loops, Rice Krispies, Pop-Tarts, Eggo, Kashi, and Morningstar Farms. The firm generates 40% of its sales from outside the United States.

Kellogg has been taking strategic steps to reignite its sales trajectory. These include moving away from direct store distribution in favor of warehouse delivery, divesting noncore fare, and increasing investments in manufacturing capabilities and brands. “We view these as prudent steps to support the long-term health of the business,” says a Morningstar report, pointing to the sizable stock price discount and the near 4% dividend yield. “In a sector where undervalued opportunities are few and far between, investors should consider snacking on wide-moat Kellogg.”

“We’ve ascribed to the notion Kellogg is poised to profitably reignite its sales trajectory,” says Morningstar sector director Erin Lash, who pegs the stock’s fair value at $82, significantly above its current price. The firm’s sustainable competitive advantage, or wide moat, stems from intangible assets and cost edge, reflecting “Kellogg's ability to generate returns above its cost of capital over the next two decades,” she adds.

Coca-Cola (KO)
Current yield: 3.41%
Forward P/E: 22.27
Price: $48.15
Fair value: $54
Value: 11% discount
Morningstar Economic Moat Rating: Wide
Morningstar Moat Trend Rating: Stable
Morningstar Rating: 4 Stars

Data as of Jan. 29, 2021

Beverage behemoth Coca-Cola owns the world’s leading carbonated beverage brands including Coke, Fanta, and Sprite, as well as nonsparkling brands, such as Minute Maid and Georgia Coffee. The company entered the hot-beverage market after buying British coffee giant Costa.

Big Red generates most of its revenue internationally and is well positioned to benefit from the growing wealth in emerging markets. “Coca-Cola’s ubiquity and brand resonance in the nonalcoholic beverage category has been going strong for over 130 years, and we see structural dynamics that will ensure this persists,” says a Morningstar equity report.

Emerging markets account for more than 40% of sales with burgeoning middle classes and low per-capita CSD consumption. “The runway for growth is supported by ample room for share gains as well as geographic tailwinds,” asserts Morningstar equity analyst Nicholas Johnson, who forecast “commercial drinks will become a larger portion of beverage consumption globally, and see the company executing against each of its market-specific strategies.”

While facing coronavirus disruption, secular headwinds from consumer sentiment, and stiff competition, Coke is “more than equipped to defend its turf” and is set to bounce back this year, says Johnson, who pegs the stock’s fair value at $54.

Lockheed Martin (LMT)
Current yield: 3.23%
Forward P/E: 12.20
Price: $321.82
Fair value: $433
Value: 26% discount
Morningstar Economic Moat Rating: Wide
Morningstar Moat Trend Rating: Stable
Morningstar Rating: 4 Stars

Data as of Jan. 29, 2021

World’s largest defense contractor and fighter aircraft manufacturer Lockheed Martin operates Aeronautics (the F-35 program), rotary & mission systems (the Sikorsky helicopter business), missiles and fire control (missiles and missile defense systems), and space systems (satellites).

“We view Lockheed Martin as the highest-quality defense prime contractor, given its exposure as the prime contractor on the F-35 program and its missile business,” says a Morningstar equity report.

Given that the defense budget and the allocation of the budget is a political process and difficult to predict, wide moats are prevalent in the defense business. “We favor companies with tangible growth profiles through a steady stream of contract wins, ideally to contracts that are fulfilled over decades,” says Morningstar equity analyst Burkett Huey, pointing out that many programs are procured and sustained over decades. He appraises the stock's fair value to be $433.

Vikram Barhat does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.