Are There Any Stock Values Left?

One of the highlights each year for us at Morningstar is our annual Investment Conference, which just wrapped up Friday. (You can see our complete coverage of the conference, including analyst blog posts and manager interviews, by clicking here.)

The question that seemed to be on everyone's mind this year was much more pragmatic than the broad macroeconomic concerns that have dominated recent conferences: are there any attractively priced assets left? This isn't a shocking question to come up given the impressive investment returns we've seen recently. Stocks have become a bit shaky in the last few weeks but the S&P 500 is up 27% during the past 12 months and has turned in a nearly 17% annualized return during the past three years. The big, sustained, runup left many at the conference wondering if stocks were just getting too expensive. There are even more questions about fixed-income valuation levels given how low absolute-yield levels are today. These worries were top-of-mind for many attendees. Concerns of the Fed tapering its asset purchases induced volatility, and outflows that bond funds saw in May brought into focus how vulnerable many fixed-income categories could be in a rising-rate environment. 

Although it might not be the most satisfying thing to hear, the consensus from the conference was that the days of finding big bargains are long gone but that many equities and certain parts of the fixed-income market are fairly priced and should help provide acceptable long-term returns. Beyond that, virtually everyone agreed that being invested beats sitting on the sidelines in cash. The guaranteed real loss of purchasing power that investors in cash are going to suffer was generally regarded to be as worse as buying fairly priced assets. 

Exactly what those fairly priced assets are was a big topic of discussion throughout the event. There was a broader range of opinions on the fixed-income side. For example, GMO's James Montier thinks that investors should avoid Treasuries, while AQR's Michael Mendelson thinks they still deserve a place in an investor’s portfolio. Brandywine's Steve Smith and PIMCO's Curtis Mewbourne each see value in Mexican sovereign bonds. 

There were plenty of ideas in the equity realm, as well. Oakmark's Bill Nygren talked about why he liked  Google (GOOG) and others such as John Spears of Tweedy Browne see value in some large-cap tech names such as  Cisco Systems (CSCO). Generally speaking, managers seemed to think that valuations were quite full or even a bit stretched in most sectors. But they also said that high-quality U.S. companies would be able to keep growing and make solid long-term holdings.

Morningstar's team of equity analysts broadly agree with this view, too. The median price/fair value ratio is currently sitting right at 1.00. But there are a number of very good companies trading below their intrinsic values that could be interesting today. To uncover some of these undervalued names, we used Morningstar's  Premium Stock Screener to find wide-moat companies with Morningstar Ratings for stocks of at least 4 stars. You can run the screen for yourself  here. Below are three stocks that passed.

 Exxon Mobil (XOM)       
| Fair Value Uncertainty: Low       
From the  Premium Analyst Report: 
ExxonMobil sets itself apart from the other majors as a superior capital allocator and operator. Through a relentless pursuit of efficiency, technology, development, and operational improvement, it consistently delivers higher returns on capital relative to peers. However, we think ongoing low U.S. natural gas prices are likely to prove a drag on returns, which could fall behind those of more oil-exposed peers. 

 Facebook (FB)         
| Fair Value Uncertainty: High      
From the  Premium Analyst Report: 
Facebook is building the foundation to revolutionize online advertising. However, the company will need to leverage its proprietary consumer data beyond Facebook as an intermediary to place advertising across the Internet at large.

Facebook's massive base and engagement arguably create advertising opportunities that capture reach and target based on specific criteria. Growth in Facebook's user base across geographies has been impressive. Monthly active users were 1.1 billion at the end of the first quarter of 2013, 23% more than reported in the year-ago period. These users are logging into Facebook at least once a month, communicating with friends, posting pictures, and using applications. We believe hundreds of millions of users face switching costs that keep them from leaving Facebook. People are unlikely to leave unless they can take their network of friends, content, and applications with them.

 McDonald's (MCD)         
| Fair Value Uncertainty: Low     
From the  Premium Analyst Report: 
McDonald's remains resilient despite an increasingly challenging environment for restaurant operators. Although it's unlikely that the firm duplicates the almost 1,500 basis points of operating margin expansion it posted during the last five years, we are optimistic that it is capable of generating superior returns on invested capital over an extended horizon. Our confidence stems from unrivaled scale advantages, an incredibly strong brand, a cohesive franchisee system, and ample international growth opportunities. Despite a few self-inflected product pipeline and value-menu management missteps during 2012 as well as industry competition that remains fierce, we don't expect McDonald's strong competitive positioning to abate anytime soon and we believe the company possesses the widest economic moat in the restaurant category.

All data as of June 14.