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What Sectors Are Most Undervalued?

We offer three picks in the most undervalued sector, energy.

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Given the market turmoil we’ve experienced during the past few weeks, it’s time check in on the Morningstar Market Fair Value.

This metric shows how big of a gap, on average, we see between market prices and our estimate of intrinsic value across the entire market or a specific sector.

The current ratio for all rated stocks is 0.74. This indicates that the market is about 26% undervalued today. The market hasn’t been this undervalued by our metrics since 2011.

No sector is overvalued today. With a ratio of 0.85, the consumer defensive and utilities sectors are the closest to fairly valued.

In particular, utilities have been overvalued for a long time, as investors have sought out these stocks for their high yields. This pullback in prices offers a buying opportunity for investors.

The most undervalued sector is energy at 0.44--that's 56% below our estimate of intrinsic value.

Some of our top picks in the energy sector include Diamondback Energy (FANG), Enbridge (ENB), and Cenovus Energy (CVE).