The US stock market appears fully valued, despite volatility towards the end of the year, say Morningstar equity analysts, with the price/fair value ratio for S&P 500 stocks that are under Morningstar research at 94% as of December 31, down from last month’s ratio of 99%.
The S&P 500 fell by 9.18% in December, closing at 2,507 at the end of the month. On a relative basis, utilities and healthcare ranked as the most expensive sectors, trading at roughly 100% of fair value.
Energy was the cheapest, trading at 85% of fair value. Please refer to the table later in the report for more details on sector valuation.
As of December 31, the Global Large Cap Pick List was priced at 76% of fair value. This list surfaces large cap global stocks within each Morningstar sector that analysts believe warrant consideration as they are trading at less than their fair value.
Consumer staples constituents presented the greatest opportunity, with a market-capitalisation weighted average price/fair value near 65%.
What Stocks Have Analysts Swapped?
Analysts made numerous changes to the list this month. Beginning in the communication services sector, we added shares of CBS and Dish. We then removed NetEase and KDDI.
In the consumer discretionary sector, we added toy maker Mattel (MAT) and tech stock Alibaba (BABA) as we removed autos Fiat Chrysler Automobiles and BMW.
Analyst R.J. Hottovy says of Alibaba: “We assign Alibaba a wide economic moat rating based on its strong network effect, where the value of the platform to consumers increases with a greater number of sellers, and vice versa. Despite recent macroeconomic uncertainty, we expect China and Southeast Asia’s digital commerce industry to have a very long runway of growth based on consumer disposable income and consumption trends, increasing Internet and mobile adoption rates, and a highly fragmented brick-and-mortar retail industry.
“This is in contrast with other network-based industries, which have often reached a more mature state by the time leading players fully establish a meaningful network effect.
“Alibaba’s ‘ecosystem’ is made up of three leading Chinese online retailing platforms: Taobao Marketplace, China’s largest online consumer-to-consumer shopping site; Tmall, China’s largest third-party business-to-consumer platform for branded goods; and Juhuasuan, China’s most popular group buying marketplace by monthly active users.”
In the consumer staples sector, we omitted Coty while adding Conagra Brands. Turning to energy sector, we added shares Exxon Mobil and TransCanada. We dropped Total and Cenovus Energy CVE.
In the financials sector, Affiliated Managers Group was removed from the list. We replaced this name with Wells Fargo. In the healthcare sector, we removed shares of Biogen, Royal Philips and Incyte INCY and added CVS Health, AmericsourceBergen and Fresenius Medical Care.
BAE Makes the Value List
In the industrials sector, we added BAE Systems (BA.) and Raytheon as we removed Masco and Caterpillar.
Analyst Denise Molina details: “The United Kingdom promotes BAE as a national champion in crucial areas such as aircraft carriers, naval vessels and submarines, armoured fighting vehicles, general munitions, and network-enabled capability.
“As the dominant – and, in many instances, the only – player in these markets, BAE enjoys an unbeatable advantage. BAE’s strong relationship with the British government is an intangible asset, as the government has a golden share in the business, which can block a foreign takeover. In 2012, a merger between BAE and EADS collapsed, as the companies could not resolve state concerns about the deal, with the UK, French, and German governments unable to reach agreement.
“The UK wanted its counterparts to agree to limit their influence in the merged firm in order to maintain BAE’s strong working relations with the U.S. Pentagon.”
In the information technology sector, we omitted Nokia and Broadcom while adding Alliance Data Systems and Applied Materials. Turning to materials sector, we added shares of Nutrien. We dropped Martin Marietta Materials. In the utilities sector, we removed shares of PPL and added Dominion Energy.
