These Stocks Still Have Room to Run

The market has staged a bit of a comeback in recent weeks. For the year-to-date period, many stock sectors are in the red, but over the past month, things have looked considerably rosier. After falling around 10% over the first six weeks of the year, the S&P 500 has gained 7.0% over the past four weeks through March 30.

The two top-performing sectors over the past month are energy (up 10.2%) and basic materials (up 10.3%). In aggregate, we don't see too many bargains in these two sectors today; basic materials stocks look somewhat overvalued, with the average company under our coverage trading at a 12% premium to our fair value estimate, says senior equity analyst Jeffrey Stafford. And while there are some values to be found in energy, equity analyst David Meats cautions that with much uncertainty surrounding crude oil, near-term prices could remain ugly or deteriorate further.

But that's not to say that there aren't bargains out there. In fact, in a recent stock market outlook, director of equity research Elizabeth Collins wrote that the overall market looks slightly undervalued currently, based on our fair value estimates for approximately 1,500 global companies. The financial services, consumer cyclical, and healthcare sectors look most undervalued. With the exception of healthcare, where the typical stock has risen only 3.2% over the past four-week period, the other undervalued sectors have enjoyed returns that are, on average, fairly in line with that of the S&P 500 Index over the period.

We used our Premium Stock Screener to find some wide- and narrow-moat stocks that have had the wind at their back but still look undervalued. While there's no saying if their positive momentum will continue in the short term, our analysts have confidence that these picks have plenty of room to run over the long haul. We screened our coverage list for stocks rated 5 stars, with a moat rating of wide or narrow (meaning we think they have competitive advantages that fend off competitors for at least 10 years). We added the criterion that the stocks had outperformed the S&P 500 over the trailing one-month period. As of March 31, our screen returned five companies. (To see the complete list and adjust the inputs to your specifications, please click here.) Here's a closer look at three stocks that made it through the screen.

Novartis

NVS

Moat Rating: Wide

Uncertainty Rating: Low

Fair Value Estimate: $92.00

Current Price: $72.44

While political drug reform concerns and patent expirations have weighed on Novartis' stock price lately, healthcare sector director Damien Conover believes the company is strongly positioned for solid long-term growth.

Unlike competitors who focus more exclusively on high-margin pharmaceuticals, Novartis has a diversified operating platform that includes branded pharmaceuticals, generics, eye-care products, and consumer products. This reduces overall volatility and creates cross-segment synergies, Conover wrote in an analyst report. The company's pharmaceutical segment is remarkable, however, in the "sheer number of blockbusters, including Gilenya for multiple sclerosis, and Afinitor and Tasigna for cancer," Conover said. He adds that the company has generated a superior late-stage pipeline with the recent launch of heart failure drug Entresto, which is poised to become a major blockbuster. Overall, Conover believes that this combination of a strong pipeline of new products and a diverse, well-positioned operating platform will translate into steady growth over the long term.

Amgen

AMGN

Moat Rating: Wide

Uncertainty Rating: Low

Fair Value Estimate: $194

Current Price: $149.93

Biotech firm Amgen markets several blockbuster biologic therapies in the oncology and immunology markets, which give it the intangible assets that form the foundation of its wide moat, according to equity strategist Karen Andersen. But like many pharmaceutical companies, Amgen's products face competition from biosimilars, which are beginning to be approved by the FDA for use in the United States. (Biosimilars, which are more widely used in Europe, are very similar versions of biologic drugs, though, unlike generics, they are not exact copies.) In fact, Amgen's biologics could be particularly vulnerable to competition from biosimilars because of their age and ease of manufacturing, said Andersen in a recent Analyst Report.

But Andersen thinks Amgen is well-positioned to navigate these headwinds: It has invested heavily in more efficient manufacturing and has undertaken a massive cost-cutting program, both poised to improve margins. In addition, Amgen's own large biosimilar pipeline and low manufacturing costs could make it a viable competitor in this nascent market. Amgen's newest drugs and its pipeline will also be key to countering these challenges, and she sees many drugs in the company's pipeline that look promising--chief among them, cholesterol-lowering drug Repatha.

Ralph Lauren Corp

RL

Moat Rating: Narrow

Uncertainty Rating: Medium

Fair Value Estimate: $150

Current Price: $96.26

Ralph Lauren has suffered, along with the larger apparel industry, from a recent slowdown resulting from warm weather and a lack of new fashion trends, writes Dan Wasiolek in our quarter-end article on the consumer cyclical sector. Ralph Lauren's exposure to China and increased uncertainty of economic growth in that region have also weighed on the shares. But at their current discount to our fair value estimate, we think Ralph Lauren shares are an attractive opportunity for long-term investors.

Equity analyst Paul Swinand believes Ralph Lauren has a narrow economic moat owing mainly to the strength of its brands and other intangible assets such real estate locations and key customer relationships. The company is targeting international markets for growth, and notably it has been able to "distribute its products around the world without diluting its brand image or materially cannibalizing sales." The Polo and Ralph Lauren brands "have become embedded in consumers' minds, both domestically and abroad, which we view as important, given the competitive market and low customer switching costs in apparel and accessories," Swinand wrote in a recent Analyst Report. Swinand also believes the company's efforts to build out its retail presence should help the firm boost gross margins: "With over 1,000 retail stores … the firm has ample room for retail expansion over the next decade," he wrote. "It has also begun to build out its Web-based operations and runs more than 10 e-commerce sites."