Stock Picks from Morningstar Analysts

This analyst blog is part of our coverage of the 2016 Morningstar Investment Conference.

On Tuesday afternoon at the Morningstar Investment Conference, Morningstar analysts Damien Conover, R.J. Hottovy, and Dan Rohr talked about expectations for their respective sectors, and shared some best ideas.

Conover, who overseas Morningstar's healthcare sector research, says that healthcare names are among the most undervalued stocks today. (According to Morningstar's Market Fair Value Graph, the median healthcare stock in our coverage universe is 7% undervalued as of this writing.) Rising healthcare costs--and Washington's threats to overhaul them--have proven a turnoff for investors. While Conover calls costs "a valid concern," he argues that the massive influx of innovation during the past few years more than outweighs any risks from Washington.

Sources of moat in this sector are based mostly on intangible assets that accompany innovative companies. One of Conover's favorite innovators is wide-moat

Consumer strategist Hottovy notes that consumer stocks are a mixed bag. As a group, consumer cyclical stocks are undervalued while consumer defensive stocks are overvalued. In particular, Hottovy likes a number of global e-commerce giants, adding that once an ecommerce platform has 10% to 15% of a given population on its platform, it's tough for competitors to make headway. These stocks therefore establish moats. He likes wide-moat

Hottovy also expects Chinese consumption to be "huge" for some consumer stocks. In particular, he he's optimistic about companies whose products and services appeal to lower- to middle-income consumers. Stocks levered to this idea include aforementioned Alibaba and wide-moat

Finally, Hottovy thinks some of the best values in the consumer sector can be found among downtrodden apparel manufacturers, such as wide-moat

Basic materials specialist Dan Rohr notes that his slice of the market is pricey: the median basic materials stock under coverage is 13% overvalued. Rohr says China is the single most important driver of growth in the sector: "As goes China, so go these companies." Rohr expect China's market to grow at 1.5% to 4.5% over next decade, well below the rates it enjoyed during the "boom."

Companies in this sector generally earn moats by being low-cost producers, in a relative sense. And relative cost is dependent on demand. If demand is weak, prices will be weak, and the spread between the company's price and its cost won't be wide enough to create sufficient excess profits, said Rohr. Given his China view, moats in this sector are currently few and far between. For example,

One bright spot for Rohr: U.S. housing. He's optimistic on housing starts--and therefore bullish on lumber prices. Rohr's pick here is