What Looks Cheap After a Rocky Market Ride

Tim Strauts: Today we're going to look at U.S. stock market valuations through the lens of the Morningstar quantitative equity ratings. The quantitative model assigns price/fair values to individual U.S. stocks. Then, due to the breadth of our coverage, we can roll up these individual ratings to the market level to provide macro insights.

In the first chart, you see the typical Morningstar Style Box with size of company on the vertical axis and style of company on the horizontal. Now, last quarter, the market was 5.1% overvalued. Today, valuations have improved to where we're only at 1.1% overvalued. And in general, the best areas of opportunity are in value stocks and small-cap stocks, with value being undervalued by 2.7% and small-cap being undervalued by 0.8%.

In the second chart, we've taken the style box and we've put the moat rating on the vertical axis and the uncertainty rating on the horizontal. When we look at last quarter, we see that the most overvalued areas of the market were high-uncertainty stocks and no-moat stocks.

Moving to today, the most undervalued areas of the market are high-uncertainty, no-moat stocks, which are 3.4% undervalued. The reason this is is because the market volatility has increased in the last few months. And companies that are high risk--which pretty much encompasses high-uncertainty, no-moat stocks--have really sold off more than the general market.

In conclusion, while high-risk, high-uncertainty companies are the most undervalued, due to the heightened market volatility, it may not be the best time to invest. If you're looking for an opportunity, I would look to large-cap value stocks because they're also undervalued and they will have less volatility.