3 Undervalued Stocks With Momentum

Susan Dziubinski: Hi. I’m Susan Dziubinski with Morningstar. At Morningstar, we take a bottom-up, fundamentals-based approach to stock investing. We think investors should focus on companies that have advantages that will allow them to effectively fight off competition for a decade or more. And we believe in buying the stocks of those companies only when they’re trading at a sizable margin of safety. Put another way, we believe in investing in the stocks of high-quality companies that are trading at a discount to what they’re worth.

Today we’re looking at three such stocks. These companies have what we call economic moats, and they’re undervalued. They also share one additional trait: All three stocks have outperformed the broader market during the past month. But at current prices, we think these quality stocks still have more room to run.

3 Undervalued Stocks With Momentum

1. Expedia EXPE
2. Insulet PODD
3. TransUnion TRU

The first name on our list of undervalued quality stocks with momentum is Expedia. Expedia is the world’s second-largest online travel agency by bookings, and Morningstar assigns the company a narrow economic moat rating. We think the company’s efforts to bring technology, data, supply, and loyalty capability onto a unified platform versus previously managing the divisions separately in silos will support the company’s competitive advantage. The stock has significantly outperformed the market during the past month after an upbeat earnings report, but the stock still trades below its 2022 highs and well below our fair value estimate of $178.

The next name on our list is Insulet. This midsize company manufactures insulin patch pumps. With little direct competition, Insulet has been able to convert more users to its innovative, tubeless insulin pump. Morningstar expects meaningful profitability gains from the company over the next five years and has awarded the company a narrow economic moat rating. Shares plummeted in late summer/early fall as investors began to speculate about how widespread use of GLP-1 weight-loss drugs might hurt Insulet’s pump business. But shares rebounded this past month after third-quarter earnings topped expectations and management raised its outlook for the third time this year. Despite the pop in the stock price, shares still look undervalued relative to our $234 fair value estimate.

The final stock on our list of cheap stocks with momentum that have more room to run is TransUnion. One of the big three consumer credit bureaus, TransUnion has carved out a wide economic moat, in our opinion. And given the fixed costs inherent in a data-intensive business, TransUnion has been able to generate meaningful margin expansion over the past several years. However, after the company reported disappointing third-quarter earnings and issued a disappointing fourth-quarter forecast, the stock plunged. From Morningstar’s perspective, one of two things is likely to happen: The company is taking a big bath and resetting expectations, which sets up the stock favorably, or a worsening macroeconomic environment with student loan payments resuming and interest rates spiking will result in further revenue misses. We take the former view, and we think the market may be doing the same today, with shares rebounding in November. However, despite the recent runup, the stock still looks undervalued to us: We think the stock is worth $91.

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Morningstar senior analysts Debbie Wang and Dan Wasiolek and analyst Rajiv Bhatia contributed the research behind this segment.

Watch “Are Small-Cap Stocks Worth Investing In?” for more from Susan Dziubinski.