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Financial Advice

Weekly Wrap: Stocks to Avoid, Bond Funds to Consider, and Taxes

And why it might be time to get back into growth stocks.

Is It Time to Get Back Into Growth Stocks?

If you’re interested in reliving January--or want a better understanding of what things looked like after the dust settled--check out "7 Charts on the Market’s Wild January." It’s filled with useful perspective--and maybe a few surprises.

For instance, I knew that tech stocks got knocked around in January, suffering a 9% loss overall. What I didn’t realize was the enormous gap in performance between growth stocks and value stocks for the month: Value stocks outlegged their growth counterparts by 11 percentage points, the largest outperformance since February 2001.

Value's dominance probably made Morningstar's chief U.S. markets strategist Dave Sekera grin, at least a little bit: Going into 2022, Dave had pointed out that value stocks were one of the few undervalued pockets in the market. What does he think now, after value's dominant outperformance in January? "We continue to find the value category attractively priced. However, carnage across growth stocks pushed them down well into undervalued territory," he says. Dave highlights Microsoft MSFT, Alphabet GOOGL, and dozens of other bargain-priced ideas--growth-oriented and otherwise--in "Pullback an Opportunity to Pick Up Undervalued Stocks."

Stocks to Avoid

Despite the rough-and-tumble start to 2022, many stocks still look overpriced to Morningstar's analysts, based on their fair value estimates. In my Our Picks column this week, I took a look at four stocks trading well above what we think they're worth. My colleague Dave Sekera examined overvalued mega-cap stocks, too--Tesla TSLA and Apple AAPL are just two of the 12 familiar names on Dave's list.

Bond Funds to Consider

Bonds didn't have anything brag about in January. Every major bond-fund Morningstar Category (except bank loans) posted losses last month, and funds that held bonds sensitive to interest-rate changes fared the worst. "Lately, there's been virtually no place for bond investors to hide," observed my colleague Katherine Lynch in her comprehensive recap, "Bond Funds Start 2022 in a Sea of Red."

I asked Christine Benz, Morningstar's director of personal finance and retirement planning, how investors should be thinking about bonds these days. Her reply: "Because of their low-starting yields, bond funds are unlikely to have great returns over the next decade, and they may experience some short-term losses as interest rates move up. But high-quality bond funds are still likely to hold their ground pretty well in a big equity market shock. That means that holding assets in cash and bonds is essential for anyone who's getting close to drawing upon their portfolios for living expenses, such as retirees."

Those looking to add some bonds to their portfolios can find some new ideas in "The Best Active ETFs for 2022 and Beyond," which analyst Mike Mulach published earlier this week. You can find more of our highest-rated fixed-income choices in "The Best Taxable-Bond Funds."

It’s Tax Season!

I’m not actually as excited about tax season as the exclamation point above might suggest. But Christine Benz says that, yes, doing tax work should be on our February financial to-do lists. Pulling together all of our paperwork--virtual or otherwise--is only one part of the process, says Christine. While you’re at it, use your tax documents to gauge your financial health, too: “So, for example, if you've gotten your W-2 recently, and you also were lucky enough to get a raise last year, look at whether you are funding your 401(k) to the maximum extent that you can swing. Look at your health savings account contributions. If you're able to make an HSA and you're covered by a qualifying high-deductible healthcare plan, are you taking advantage of those HSA contributions to the extent that you possibly can?”

Read on to find out what you can learn from your 1099 form, and watch Christine’s February financial to-dos video.

Stock of the Week: Alphabet

Alphabet blew the roof off with its fourth-quarter results, thanks to growth in search advertising and Google cloud, as well as further YouTube monetization. And strong revenue created operating leverage that widened margins more than expected, explained Morningstar analyst Ali Mogharabi. "While we expect slower revenue growth this year, we project double-digit growth in YouTube and cloud to continue," Ali noted in his analyst update on the stock. We boosted our fair value estimate to $3,600, and shares look undervalued as of this writing.

Alphabet also announced that it plans to do a 20-for-1 stock split in July. My colleague Ruth Saldanha wrote a terrific piece this week about what stock splits are and how the Alphabet stock split will work. As Ruth says, it's just math!

--Susan Dziubinski

Editor's Picks

Your Financial To-Do List for February 2022 It's time to review your investments and use your tax documents to assess the health of your savings plan.

Best Financial Services Companies to Own: 2022 Edition What drives these firms' competitive advantages varies by industry.

2021 Closes Out on an Optimistic Note Despite Multiple Bumps in the Road Our quarterly markets review digs into inflation risks and the impact of the Great Resignation.

4 Electric Vehicle Technology IPOs to Watch for in 2022 Plus the largest anticipated tech IPOs of the year.

Will Vaccine Manufacturers' Windfalls Continue Beyond 2022? We think the COVID-19 treatment market will have more longevity.

The Supreme Court Sides With 401(k) Participants It's a victory for employees, but a headache for plan sponsors.

Portfolio Planning and Personal Finance With Christine Benz

What You Can Learn From Your 1099 Forms These forms can yield valuable information about your portfolio's asset location and tax efficiency.

Mutual Funds and Exchange-Traded Funds

Lessons From Vanguard Target-Date's Capital Gains Surprise Target-date funds are best kept where most of them are: in a tax-deferred account.

The Winners Take It All in Liquid Alternatives Liquid alternative strategies saw big inflows in 2021, yet only a small handful earned the spoils.

Why Sector Funds Are a Bad Bet These funds sound good on paper but can be difficult to use effectively.

The Best Active Bond ETFs for 2022 and Beyond Fidelity and Pimco lead the way.

ETF Flows Cool Off as Stocks Stumble Out of the Gate Tepid ETF flows accompanied turbulent markets in January.

Should You Buy Commodity Producer ETFs? Direct commodity ETFs are a more attractive way to get exposure.

4 Newly Rated Funds to Consider These funds have recently earned their first Morningstar Analyst Ratings.

Bond Funds Start 2022 in a Sea of Red As the Fed looks to raise interest rates, funds most sensitive to rate changes have been hit hardest.

3 ETFs for an IRA Income-producing ETFs are great choices for tax-deferred accounts.

Stocks

Dividend Trends for 2022 Morningstar's U.S. markets strategist Dave Sekera shares his expectations for dividend growth and share buybacks this year.

7 Charts on the Stock Market's Wild January Volatility leads stocks to their worst start since 2009

4 Stocks to Avoid Despite a rough January for stocks, these names still look overvalued by our metrics.

Pullback an Opportunity to Pick Up Undervalued Stocks Value remains attractive, but time to rotate back into growth … and even some tech.

Undervalued AT&T Is on the Right Path AT&T's dividends will be smaller, but Morningstar's analyst says the refocus on the telecom business should reward patient investors.

Will Dividend Stocks Outperform This Year? Dave Sekera discusses the prospects for dividend stocks in 2022.

Morningstar's Take on Hard-Hit Social Media Stocks Meta, Twitter, Pinterest, and Snap are all deep in undervalued territory.

What Do Rising Interest Rates Mean for Dividend Stocks? Dave Sekera discusses the impact of inflation and rate hikes on dividend-paying names.

Sustainability Matters

Sustainable Fund Flows Dip for the Quarter but Peak for the Year Passive funds are dominating flows but active funds still hold the majority of assets.

Read This Before You Start Investing in Sustainable Funds Understanding the basics of sustainable investing, part 1.

After Defeating Costco, Investors Push Food Companies to Detail Greenhouse Gas Output Here's what to know about those thorny, tough-to-monitor scope 3 emissions.

Rekenthaler Report

Why the 60/40 Portfolio Continues to Outlast Its Critics The doubts keep coming, but so does the strategy.

The Long View Podcast

Andrew Lo: Finding the Perfect Portfolio--a 'Never-Ending Journey' The author and financial researcher discusses his new book on the rise of Modern Portfolio Theory and practice.

The Short Answer

What is a Stock Split? Companies like to play with the price of their stocks. Here's why and what you should know.

Commentary

Tired of Playing Games? Michael Mauboussin dives into expectations investing and how you can game the market.

Static-Dynamic Factor Attribution--Another Dimension Morningstar's new static-dynamic attribution tool provides more insight into how well factor exposure adjustments were timed.

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