Morningstar is bullish on these value stocks.
For more than a decade, growth stocks have significantly outperformed value stocks. That theme has continued in 2020, but economic uncertainty, geopolitical unrest and stretched growth stock valuations now have some investors taking a closer look at value stocks as long-term investments. Some analysts say the massive government stimulus programs implemented this year will eventually trigger elevated inflation and higher interest rates, conditions conducive to value stock outperformance. The Morningstar analyst team rates all the stocks in its coverage universe on a scale of one to five stars. Here are seven value stocks to buy that have five-star Morningstar ratings.
Exxon Mobil Corp. (ticker: XOM)
The entire oil and gas industry has struggled in 2020 due to a steep drop-off in travel and industrial demand. In addition, investors have shied away from oil and gas stocks due to concerns the industry is in secular decline. Shares of oil major Exxon Mobil are down about 50% in 2020. However, analyst Allen Good says Exxon's 10% dividend is safe and losses likely peaked in the second quarter. Meanwhile, Exxon is investing in an initiative to double its 2017 earnings and cash flow by 2025. Morningstar has a "buy" rating and $74 fair value estimate for XOM stock.
Philip Morris International (PM)
Philip Morris International is one of the largest international tobacco companies and owner of brands such as Marlboro, Parliament and L&M. Analyst Philip Gorham says Philip Morris' cost control measures have been impressive so far this year, and IQOS heated tobacco product sales have held up particularly well. Gorham says the stock is undervalued and the recent U.S. Food and Drug Administration ruling that IQOS can be marketed in the U.S. is not yet priced into the stock. Philip Morris also pays a 6.1% dividend. Morningstar has a "buy" rating and $98 fair value estimate for PM stock.
Wells Fargo & Co. (WFC)
Wells Fargo is one of the big four U.S. megabanks. It has underperformed its peers in recent years due to scandals involving fraudulent customer accounts, aggressive marketing and other issues. Analyst Eric Compton says the Federal Reserve's commitment to keeping interest rates near 0% for at least three more years pressures banks' net interest margins. It may take years before Wells Fargo completes its turnaround efforts, but Compton says it remains one of the nation's top lenders, and it has a core group of loyal, longtime customers. Morningstar has a "buy" rating and $46 fair value estimate for WFC stock.
CVS Health Corp. (CVS)
CVS Health is a drugstore chain and one of the world's largest vertically integrated health care companies following its 2018 acquisition of Aetna. CVS shares are down about 40% overall in the past five years, but analyst Julie Utterback says CVS has the potential to leverage its pharmacy benefit manager and insurance businesses to generate double-digit annualized earnings growth in the long term. In addition to its MinuteClinic concept, CVS also plans to roll out its HealthHub concept in 1,500 retail locations by the end of 2021. Morningstar has a "buy" rating and $92 fair value estimate for CVS stock.
Simon Property Group (SPG)
Simon Property is a real estate investment trust that owns and operates regional malls and premium outlets. Simon shares are understandably down about 55% in 2020. However, analyst Kevin Brown says Simon's 92.9% occupancy rate in the second quarter was much better than he had expected. Management expects to return to 97% to 98% rent collection in the fourth quarter and beyond. Brown says Simon's top-tier properties will continue to be highly sought after by retailers pursuing omnichannel strategies. As a REIT, Simon also pays about a 10% dividend. Morningstar has a "buy" rating and $152 fair value estimate for SPG stock.
Shares of U.S. oil and gas exploration and production company ConocoPhillips are down about 46% year to date. Good says it's understandable why investors have shunned exploration and production companies after such horrendous performance over the past decade. However, ConocoPhillips' 10-year plan for responsible investment, consistent growth, improved efficiency and aggressive capital returns differentiates the stock from its peers, Good says. ConocoPhillips says it can generate a 10% return on capital even at oil prices below $40 per barrel. The stock also pays a 4.9% dividend. Morningstar has a "buy" rating and $64 fair value estimate for COP stock.
Kinder Morgan (KMI)
Kinder Morgan is one of the largest midstream energy companies in the U.S. Analyst Travis Miller says litigation surrounding Kinder's Permian Highway Pipeline is the latest example of just how difficult it is for companies to complete large new energy projects. Despite the difficulties, Miller says Kinder will likely complete the $2 billion project in early 2021. Given limited investment opportunities in the current environment, Miller says investors should expect Kinder to focus cash flow on supporting its 8% dividend and reinstating buybacks as soon as 2021. Morningstar has a "buy" rating and $21 fair value estimate for KMI stock.
Consider these five-star value stocks:
-- Exxon Mobil Corp. (XOM)
-- Philip Morris International (PM)
-- Wells Fargo & Co. (WFC)
-- CVS Health Corp. (CVS)
-- Simon Property Group (SPG)
-- ConocoPhillips (COP)
-- Kinder Morgan (KMI)