An Undervalued Stock Not for the Faint of Heart

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Richard Hilgert: The focus on economic moats at Morningstar is something that is, I think, well-placed. The organization here likes to see competitive advantages in their stocks over a long term, and this increases shareholder returns for investors.

However there are occasions where there are undervalued stocks which we believe investors could benefit from even though they are no moat rated.

One of those stocks Fiat. It currently trades at EUR 7.90, and we have a fair value estimate of EUR 14. However this stock is not for the faint of heart. It's a turnaround story with a leveraged balance sheet, and it operates in a cyclical capital-intensive, highly competitive industry.

However, we think that Fiat will benefit from integration with Chrysler Corporation which it purchased the rest of Jan. 20 this year. That integration will allow the company to combine together more parts and more architectures for more vehicles.

There are some concerns, though, that we want investors to be aware of. It's a down market in Brazil where Fiat has the number-one market share. It's a down market in Europe where demand has been anemic for six years. However, we think it's in trough and recovering now. There is also a substantial amount of leverage on the balance sheet, but we think that this is well offset by relatively large cash position.

Altogether we think that this is a good investment for those who are willing to take on the risk, and we should see better cost of capital once the stock begins trading as expected on the New York Stock Exchange later this year.