A falling share price may not seem like a positive thing – but for potential investors it is a good signal to buy. While you can almost guarantee you won't time the market perfectly, and probably make a loss before a gain, in the right stock, this act of bravery will be rewarded.
Shares can fall in value for a number of reasons – a set of bad results, contagion, investor sentiment, a board reshuffle, or that the fundamentals are strong but the stock has been misjudged by the market. It is this last situation which is the sweet spot for value investors – spotting diamonds in the rough, which will reward shareholders when the market recognises their worth.
Morningstar equity analysts spend their time working out the true value of the companies under their coverage – an impressive 1,800 plus worldwide. Analysts believe a company's intrinsic worth results from the future cash flows it can generate, they call this the share’s “fair value estimate”. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic value. The rating takes the form of stars – one to five – with one star signifying a company that is trading significantly above its fair value estimate. Three stars signifies the company is fairly valued by the market, and five stars mean it is currently significantly below fair value.
These stocks have recently acquired a five-star status, meaning they have recently seen their share price fall, but over the long term, should rally to their fair value estimate.
General Electric (GE)
The investment thesis for General Electric has swiftly changed from transformative growth to turnaround as the industrial giant embarks upon a multiyear restructuring to drive out excess corporate costs, aggressively manage working capital, and fix its struggling power generation business, says Morningstar equity analyst Keith Schoonmaker.
While analysts initially applauded the bold move to separate GE Capital and retain focus on GE’s industrial roots, they believe that overreaching ambition ultimately cost prior CEO Jeff Immelt his job. The flaw, in their opinion, was tackling too much too soon.
Managing the complex unwinding of GE Capital while supporting important new product launches in power and aviation, integrating Alstom, and courting Baker Hughes left GE with too many concurrent calls on cash and vulnerable when customer demand began to flag in its important power segment. Cutting the dividend for the second time in a decade is a stark reminder that even great portfolios can suffer under the weight of poor capital allocation.
China Mobile (CHL)
With more than 877 million customers, China Mobile not only dwarfs its Chinese competitors, but also is the world's largest wireless telephone company by far, says analyst Dan Baker. It has more 3G/4G subscribers than its competitors despite being handicapped by the Chinese government, which required it to use the home-grown TD-SCDMA technology standard for 3G mobile.
However, with the industry shift to 4G, the technology playing field is more level, as the strong handset ecosystem development in the first few years of operation of China Mobile's TD LTE network means that the technology gap between its 4G version and its competitors is much smaller than it was for 3G.
PG&E (PCG)
Just as PG&E emerged from the long, dark shadow cast over it from the September 2010 San Bruno explosion and subsequent gas pipeline issues, it now faces another round of legal, regulatory, political, and financial uncertainty related to California wildfires, says analyst Travis Miller.
Public and regulatory scrutiny come with being the largest utility in California. Analysts believe shareholders should be prepared to see PG&E in the headlines, both good and bad. Implementation of California's energy initiatives and the projected 2024/25 retirement of the Diablo Canyon nuclear power plant are other current topics to monitor.
Wildfire liabilities that could top $10 billion would far surpass what they estimated were about $3 billion of net fines, rate credits, and unrecovered investments totalling $6 per share of lost value related to post-San Bruno gas pipeline issues. PG&E's board suspended the dividend in late 2017 and analysts think it could remain suspended until at least late 2018. Worst case, PG&E might not pay out a significant dividend for several years. This comes just one year after shareholders received their first dividend increase in six years, dating back to the San Bruno disaster.
However, shareholders should have faith in the state's mostly constructive regulatory framework that supports earnings and dividend growth. Between PG&E's exit from bankruptcy in 2004 and San Bruno, the company posted sector-leading earnings growth and stock returns by investing to meet the state's energy policy goals.
