2 Stocks to Buy After Recent Fair Value Increases

Key Takeaways

• The fair value estimate represents what we think a stock is worth, based on the future cash flows our analysts expect the company to generate.
• A fair value boost isn’t a buy signal. From our perspective, a stock is only a buy if it’s trading well below our fair value estimate.
• Today we’re looking at two stocks that experienced fair value increases this month and that are trading well below their fair value estimates: Host Hotels & Resorts HST and Biogen BIIB.

Susan Dziubinski: Morningstar analysts calculate an intrinsic value—or what we call a fair value estimate—for each of the stocks they cover. The fair value estimate represents what we think the stock is worth, based on the future cash flows our analysts expect the company to generate. Given their focus on the future, fair value estimates don’t change often.

What can trigger a change in a fair value estimate? Sometimes fair value changes are simply triggered by an update to our time value of money. Other times, a bit of good news or positive insight, such as a meaningful change in revenue expectations, improving margins, new information, or emerging trends in an industry can lead analysts to increase a stock’s fair value estimate.

Although a fair value increase is a good sign—after all, something has improved to trigger it—a fair value boost isn’t a buy signal. A stock is only a buy, from our perspective, if it’s trading well below our fair value estimate.

Today we’re looking at two stocks that experienced fair value increases this month and that are trading well below their fair value estimates.

The first stock is Host Hotels & Resorts. We recently raised our fair value estimate of the stock from $18.50 to $24.00, after incorporating quarterly results and boosting our estimate for margins for the company’s hotel portfolio. Host has been able to cut operating costs in many categories, which should lead to long-term efficiencies. We think that as inflation drives daily rates higher and business travel slowly comes back online that hotel margins will eventually stabilize well above their prior peak. We think Host is currently trading at an attractive discount to its fair value.

Next is Biogen. We raised our fair value estimate on the stock to $340 from $330 after the U.S. Food and Drug Administration granted accelerated approval to Biogen and Eisai’s Alzheimer’s drug, Leqembi. We expect that positive phase 3 data presented in November will allow Leqembi to gain full approval and strong reimbursement from private payers and Medicare by the end of 2023. We model $5 billion in annual Leqembi sales by 2031, with the profits shared by the two partners. The wide-moat stock of this drugmaker looks undervalued today.

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Morningstar senior analyst Kevin Brown and sector strategist Karen Andersen contributed the research behind this segment.