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Strong Market Lifts More Stocks Above Fair Values

With the Morningstar US Market Index climbing nearly 10% in the fourth quarter of 2019, the median stock in our North American coverage now trades at a 3% premium to our fair value estimate compared with a 2% discount near the end of the third quarter. Of the roughly 800 North American stocks we cover, 32% have an overvalued rating of 1 or 2 stars compared with only 21% with an undervalued rating of 4 or 5 stars. Only three of the 11 sectors we cover have a median stock with a price/fair value ratio below 1: energy, consumer cyclical, and communication services.

  • Energy remains the cheapest sector in our coverage. The long-term economics of supply and demand point to oil and natural gas prices of $55 per barrel (West Texas Intermediate) and $2.80 per thousand cubic feet (Nymex)—levels that make many U.S. energy stocks attractive at today's prices.
  • Consumer cyclical stocks also look relatively attractive. Those looking for a bargain in the sector may want to take advantage of the uncertainty plaguing travel and leisure, which trades at a 12% discount to our valuations.
  • Technology stocks were on fire in 2019, and we don't see much value in the sector today. The median U.S. technology stock is 11% overvalued, and we see no subsectors where the median stock is cheap.

Energy Continues to Hold the Largest Share of Buying Opportunities - source: Morningstar