3 Undervalued Stocks With Momentum in 2023

Susan Dziubinski: Here at Morningstar, we talk a lot about the dangers of chasing performance, or buying a stock, ETF, or fund because it’s on a hot streak. So, a video suggesting that investors consider stocks that’ve soared might seem out of character from us.

But outperformance and overvaluation don’t always go hand in hand. In other words, just because a stock has risen significantly doesn’t mean it’s overvalued. Morningstar bases our fair value estimates of stocks on our expectation of future cash flows. Recent stock performance plays no role in our fair value assessment. We’re focusing on long-term intrinsic value. And as a result, stocks that have rallied may not have reached our estimate of their long-term intrinsic value.

Today we’re looking at three stocks that have all performed extremely well so far in 2023 and that still look undervalued to us. We think these stocks have more room to run.

3 Undervalued Stocks With Momentum in 2023

These 4- and 5-star stocks look undervalued. Data as of Feb. 7, 2023.

1. Scotts Miracle-Gro SMG
2. Spotify SPOT
3. SoFi Technologies SOFI

The first stock on our list is Scotts Miracle-Gro. The stock of the largest provider of gardening and lawn care products in the U.S. has skyrocketed in 2023. While the company saw a decline in its U.S. consumer and Hawthorne businesses last year, shares have rallied on management’s cost-cutting program and the expectation of better profit growth in the next several years. Morningstar thinks Scotts has solid competitive advantages thanks to its collection of well-recognized brands, and we assign it a narrow economic moat rating. We think shares are worth $115 apiece.

The next undervalued stock with momentum is Spotify. One of the world’s largest music-streaming service providers, Spotify ended 2022 with impressive user growth, which bodes well for its revenue in 2023 and beyond. Morningstar applauds the firm’s increasing focus on top-line growth and operating more efficiently. We expect the firm to break even and/or generate operating income in 2024. The stock has shot up significantly this year, but we think it has more upside potential. We assign Spotify’s stock a $170 fair value.

The last stock on our list is SoFi Technologies. SoFi is a financial services company that got its start as a student loan refinancing business and has since branched out to include credit cards, personal loans, mortgages, and other banking services. The firm enjoyed impressive growth in deposits and personal loans in 2022, which offset weakness in student loans and mortgage originations. While the company remains unprofitable, it expects to reach profitability by the end of 2023. Although the stock has outperformed this year, Morningstar believes shares remain undervalued at today’s levels and are worth $14.50 each.

For more stock ideas, be sure to subscribe to Morningstar’s YouTube channel and visit Morningstar.com.

Morningstar strategist Seth Goldstein, senior analyst Ali Mogharabi, and analyst Michael Miller provided the research behind this segment.

Watch “3 Top Small-Cap Stocks to Buy and Hold in 2023″ for more from Susan Dziubinski.