3 Cheap Stocks a Top-Rated Fund Manager Likes

Susan Dziubinski: Hi I’m Susan Dziubinski with Morningstar.

Oakmark Fund OAKMX manager Bill Nygren was recently a guest on Morningstar’s The Long View podcast. During the appearance, Nygren talked at length about several stocks that he holds in Oakmark Fund’s portfolio. Today, we’re unpacking three of the names he talked about that Morningstar’s analysts think look undervalued today.

For those unfamiliar with Bill Nygren, here’s what you need to know. Nygren and his team at Oakmark Fund are bottom-up investors who favor large company stocks trading at least 30% below the team’s estimate of intrinsic value. They want to own stocks of companies that can grow their per-share value at least as fast as the S&P 500, and they like the managers who run the companies they own to think and act like owners themselves.

3 Cheap Stocks a Top-Rated Fund Manager Likes

1. Capital One Financial COF
2. Schwab SCHW
3. Disney DIS

The first undervalued stock that Nygren talked about on the podcast is Capital One Financial COF. Capital One was Oakmark Fund’s second-largest holding as of June 30th. Nygren noted during the podcast that during the banking crisis earlier this year, he and his team re-examined all of their financials stocks, including Capital One. They found little to worry about at Capital One, given the transactional nature of its deposits and a lack of mark-to-market risk. At Morningstar, we think Capital One has built out a narrow economic moat: Its heavy investment in technology and marketing has allowed it to build a robust online assets and deposit base that’s national in scope, giving the firm scale without having to maintain a sizable branch network. We think Capital One stock is worth $146, and shares trade well below that.

The second undervalued stock Nygren discussed during the podcast was Schwab SCHW. Nygren called the Schwab franchise “fantastic,” adding that Schwab is a lower-cost player in the wealth management space, which has allowed it to enjoy customer growth and growth of share in the wealth management industry. Morningstar assigns Schwab a wide economic moat rating thanks to its scale and cost efficiency. We think the bank side of the business is fine from a liquidity and capital standpoint, but it could take a couple of years before earnings are on an upward trajectory. But after interest rates have reset, we expect the firm to enjoy many years of double-digit earnings growth. We’ve assigned Schwab stock an $80 fair value estimate and we think shares are attractive for long-term investors.

The last undervalued stock Nygren mentioned during the podcast was Disney DIS. Specifically, Nygren talked about CEO Bob Iger’s significant cost-cutting, which Nygren expects to be value-maximizing for Disney. At Morningstar, we assign Disney a wide economic moat, thanks in part to the pricing power of its network segments and its Disney-branded businesses. Disney’s streaming segment appears on track to break even near the end of fiscal 2024, and new streaming bundles may help increase engagement and lower churn. We expect average annual top-line growth for Disney of 6% through fiscal 2027 and for overall operating margin to improve to 21% in fiscal 2027 from 8% in fiscal 2022. We think Disney stock is worth $145.

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Morningstar director Michael Wong, associate director Tony Thomas, senior analyst Neil Macker, and analyst Michael Miller provided the research behind this segment.

Watch “3 Top Stocks for the Next 10 Years” for more from Susan Dziubinski.