2 Undervalued Stocks for Contrarians to Buy Before 2023 Ends

Susan Dziubinski: Hi. I’m Susan Dziubinski with Morningstar. When it comes to stock investing in 2023, it’s been a tale of the haves and the have-nots. The “haves” are those investors who leaned heavily into the “Magnificent Seven”; the have-nots are pretty much everyone else.

In fact, there have been many stocks that’ve endured significant losses this year due to negative market sentiment, either around particular sectors or specific companies. But Morningstar thinks that the market has overreacted to the downside on many of these stocks. And we think there’s plenty of opportunity for long-term investors in some of these beaten-down names.

Today, we’re looking at two high-quality companies whose stocks are down more than 30% this year as of this taping. We think that the negative market sentiment around these stocks is overblown and that these companies are fundamentally sound and that their stocks are undervalued. If the negative sentiment lifts on these stocks in 2024, there could be plenty of upside. We therefore think these are cheap stocks for contrarians to buy before 2023 ends.

2 Undervalued Stocks for Contrarians to Buy Before 2023 Ends

1. Pfizer PFE
2. Schwab SCHW

Our first undervalued stock for contrarians is Pfizer PFE. The stock has pulled back this year, as a significant decline in COVID-19 vaccine and treatment sales have pressured overall results. However, Morningstar thinks the market is underappreciating the tail potential of Pfizer’s COVID-19 sales and the firm’s next-generation drugs. We expect COVID-19 product sales to rebound somewhat as pricing more than doubles for Paxlovid as the drug transitions to commercial plans. In addition, the firm’s solid and diverse portfolio of drugs generates massive cash flows, and its pipeline should help balance slowing sales as some of its more mature drugs face competition. We assign Pfizer a wide economic moat rating on the strength of its patents, economies of scale, and sizable distribution network. We think Pfizer stock is worth $48 per share.

Our second undervalued stock for contrarians is Schwab SCHW. While Charles Schwab is best known for its retail investor and registered investment advisor platforms, Charles Schwab Corporation is a savings and loan holding company that generates about half of its revenue from net interest income. As investors pivot from low-yielding bank deposits into higher-yielding products, such as CDs and money market funds, Schwab’s banking assets shrink, and it will have to pay more for deposits that pressure its net interest income. Morningstar expects deposits to stabilize around the end of this year, which will allow Schwab to pay down more of its high-cost funding, which will boost net interest income and earnings. And after interest rates have reset, we expect Schwab to have many years of double-digit earnings growth. We assign Schwab a wide economic moat rating thanks to its massive scale and industry-leading cost efficiency. We think the stock is worth $80.

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Morningstar directors Damien Conover and Michael Wong provided the research behind this segment.

Watch “3 High-Quality Stocks to Buy on Weakness” for more from Susan Dziubinski.