Investors have endured a lot of stock market volatility during the past few years. Given ongoing uncertainty about interest rates and the economy, investors may be wondering which stocks to buy now against this backdrop.
Regardless of where interest rates and the economy are headed, investors may want to own companies that offer some sense of certainty in terms of cash flows and company fundamentals. That’s where Morningstar’s Best Companies to Own list comes in. The companies that make up this list have significant competitive advantages. We believe the best companies have predictable cash flows and are run by management teams that have a history of making smart capital-allocation decisions.
But the best companies aren’t always the best stocks to buy. How much an investor pays to own a company—best or otherwise—is important, too. So, here we’re focusing on the 10 best companies with the most undervalued stock prices today.
10 Best Stocks to Buy Now—June 2024
The 10 most undervalued stocks from our Best Companies to Own list as of May 29, 2024, were:
- Yum China YUMC
- Polaris PII
- Roche Holding RHHBY
- Estee Lauder EL
- Ambev ABEV
- British American Tobacco BTI
- Bristol-Myers Squibb BMY
- Gilead Sciences GILD
- Rentokil Initial RTO
- Zimmer Biomet ZBH
Here’s a little bit about why we like each of these companies at these prices, along with some key Morningstar metrics. All data is as of market close on May 29.
2 Wide-Moat Stocks to Consider
The stocks of these upgraded companies may appeal to quality seekers.
2m 6s
Yum China
- Price/Fair Value: 0.46
- Morningstar Uncertainty Rating: Medium
- Morningstar Capital Allocation Rating: Standard
- Industry: Restaurants
Yum China’s stock is 54% undervalued relative to our fair value estimate of $76 per share and stays at the top of our list of best stocks to buy again this month. Morningstar senior analyst Ivan Su believes the current market price overlooks two things: Yum China’s opportunities for restaurant expansion in China’s growing fast-food industry and margin improvement that will be realized by operating leverage and ongoing digital investments. Over the longer term, we believe there are several opportunities for Yum China to gain a share in the fragmented $700 billion Chinese restaurant market. Our conviction in rising fast-food penetration is underpinned by three long-term secular trends: longer working hours for urban consumers, rapidly rising disposable income, and ever-smaller family sizes. Coupled with strong brand recognition and an unrivaled supply chain, Yum China is set to be the prime beneficiary of growing Chinese fast-food spending.
Polaris
- Price/fair value: 0.55
- Fair value uncertainty: Medium
- Capital Allocation Rating: Exemplary
- Industry: Recreational Vehicles
Polaris stock trades 45% below our fair value estimate of $145 per share. Polaris is one of the longest-operating brands in powersports. Around 70 years ago, the company started to build its reputation and brand by producing snowmobiles. In the decades since, the company has expanded into all-terrain vehicles, motorcycles, boats, and electric vehicles, building a recreational and utility vehicle powerhouse. We think Polaris stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy, says Morningstar senior analyst Jaime Katz. However, peers are innovating more quickly than in the past, which could jeopardize the firm’s ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.
Roche Holding
- Price/Fair Value: 0.57
- Morningstar Uncertainty Rating: Low
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Drug Manufacturers—General
Roche is the first of three drug manufacturers to make the list of the best companies to invest in now. The company’s drug portfolio and industry-leading diagnostics provide significant competitive advantages and underpin our wide Morningstar Economic Moat Rating, says Morningstar strategist Karen Andersen. “This Swiss healthcare giant is in a unique position to guide healthcare into a safer, more personalized, and more cost-effective endeavor,” she notes. Though Roche is facing pressure owing to the weakness of the Swiss franc against other major currencies, we expect the firm’s biologics focus and innovative pipeline to allow Roche to continue to achieve growth as its competitors face competition. Roche stock trades 43% below our fair value estimate of $55 per share.
Estee Lauder
- Price/Fair Value: 0.58
- Morningstar Uncertainty Rating: Medium
- Morningstar Capital Allocation Rating: Standard
- Industry: Household and Personal Products
With brands that include its namesake, Clinique, and Aveda, Estee Lauder is a leading provider of premium beauty products that has a strong presence across both brick-and-mortar and digital channels. We expect the company to benefit from a consumer shift in both developed and emerging markets toward higher-end beauty brands, explains Morningstar analyst Dan Su. However, we see risks on the horizon. Estee Lauder’s premium products are exposed to macro cyclicality as consumers tend to trade down or delay their higher-ticket discretionary spending amid recession concerns. In addition, Estee may need some time to refresh its lackluster cosmetics portfolio. Estee Lauder stock is trading 42% below our fair value estimate of $210 per share.
Ambev
- Price/Fair Value: 0.61
- Morningstar Uncertainty Rating: Medium
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Beverages—Brewers
Ambev stock trades 39% below our fair value estimate of $3.60 per share. Ambev is the largest brewer in Latin America and the Caribbean and is Anheuser-Busch InBev’s subsidiary in the region. It produces, distributes, and sells beer and PepsiCo products in Brazil and other Latin American countries and owns Argentina’s largest brewer, Quinsa. Brahma, the Brazilian brewer, was the first foray into the consumer product manufacturing industry by private equity group 3G. In 2000, 3G merged two Brazilian brewers, Brahma and Antarctica, creating Ambev. In part because of the favorable industry structures, and in part because of its 3G heritage, Ambev is a highly profitable business. “We estimate the company faced around BRL 3 billion in higher raw material costs in 2022,” says Morningstar director Ioannis Pontikis, “and a reversal of that by the end of 2024 would increase the gross margin by 3 percentage points, all else equal.” Pontikis also points to premiumization as a long-term growth and margin driver.
British American Tobacco
- Price/Fair Value: 0.61
- Morningstar Uncertainty Rating: Medium
- Morningstar Capital Allocation Rating: Standard
- Industry: Tobacco
British American Tobacco stock is trading 39% below our fair value estimate of $49 per share. While cigarettes will likely remain the driving force of profits in the industry for the next decade, British American Tobacco has been the most aggressive of the Big Tobacco makers with its push into new-generation products, including vaping, heated tobacco, and oral tobacco. British American Tobacco’s global volume is roughly evenly split across price segments and categories, so the company should be well positioned to maintain share as secular and cyclical shifts in consumer preferences occur, says Morningstar strategist Kristoffer Inton, but the firm’s strategy to diversify from cigarettes to nicotine categories lacks focus.
Bristol-Myers Squibb
- Price/Fair Value: 0.64
- Morningstar Uncertainty Rating: Medium
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Drug Manufacturers—General
Drugmaker Bristol-Myers Squibb joins our list of the best companies to buy now. Adept at partnerships and acquisitions, Bristol-Myers Squibb has built a strong portfolio of drugs and a robust pipeline, says Morningstar director Damien Conover. While the firm faces one of the largest patent cliffs in the industry over the next five years, we believe it has enough new products to mitigate the generic pressures and maintain its wide moat. Bristol is repositioning itself in preparation for the patent losses. It has shed its diabetes business, medical imaging group, wound-care division, and nutritional business to focus on the high-margin specialty drug group. Bristol-Myers Squibb stock trades 36% below our fair value estimate of $63 per share.
Gilead Sciences
- Price/Fair Value: 0.65
- Morningstar Uncertainty Rating: Medium
- Morningstar Capital Allocation Rating: Standard
- Industry: Drug Manufacturers—General
Drug manufacturer Gilead Sciences is trading 35% below our fair value estimate of $97 per share. Gilead Sciences generates stellar profit margins with its HIV and hepatitis C virus portfolio, which requires only a small salesforce and inexpensive manufacturing. We think its portfolio and pipeline support a wide moat, says Morningstar’s Andersen, but Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth. Several potential HIV treatments are beginning to enter phase 3 trials, and new launches could begin as early as 2027.
Rentokil Initial
- Price/Fair Value: 0.65
- Morningstar Uncertainty Rating: Medium
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Specialty Business Services
Rentokil Initial rejoins our list of best companies to buy now. The firm’s strategy is sharply focused on the attainment and maintenance of market share leadership in the highly localized pest-control and hygiene-service markets it competes in. Rentokil Initial has completed over 200 acquisitions since 2015, focusing on acquisition targets that build the geographic density of its customers. The late-2022 acquisition of Terminix Global Holdings was a transformative and moat-reinforcing deal and created a new US market share leader, says Morningstar senior analyst Grant Slade. Pest-control targets remain Rentokil’s top mergers-and-acquisitions priority, but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial. Rentokil Initial stock trades at a 35% discount to our fair value estimate of $39.50 per share.
Zimmer Biomet
- Price/Fair Value: 0.66
- Morningstar Uncertainty Rating: Medium
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Medical Devices
New addition Zimmer Biomet rounds out our list of the best companies to buy now. Zimmer Biomet is the undisputed king of large-joint reconstruction, says Morningstar senior analyst Debbie Wang, and we expect aging baby boomers and improving technology suitable for younger patients to fuel solid demand for large-joint replacement that should offset price declines. Zimmer has cultivated close relationships with orthopedic surgeons who make the brand choice. High switching costs and high-touch service lead to strong loyalty to the brand. Zimmer also aims to accelerate growth through innovative products and improved execution, which we view as critical. Zimmer Biomet stock trades 34% below our fair value estimate of $175 per share.
Find More of the Best Stocks to Invest In
You can review all of the companies on our Best Companies to Own list and dig into our methodology, which includes definitions for the key Morningstar metrics included in this article. Those with specific interests can drill down with our Best International Companies to Own, Best Sustainable Companies to Own, and Best Innovative Companies to Own lists, too. And as we outline here, we suggest that you focus your research on the undervalued stocks of the companies on these lists.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
