Equity markets have been having a good year so far, with the S & P 500 benchmark crossing 5,000 this month. However, ongoing political tensions and uncertainty over when the U.S. Federal Reserve will cut interest rates have raised questions about which sectors will perform strongly — leading a number of market players to say 2024 is a stock picker’s year . Morningstar’s chief markets strategist, David Sekera, agrees. He said it’s “always a stock picker’s market,” but that this is even more pertinent this year. “We can look at individual stocks across several themes over the past couple of years to see which stocks have really been the ones that have outperformed the broader market,” he told CNBC Pro on Feb. 2. “In my opinion, it always comes down to individual stock selection.” Sekera is bearish on the consumer defensive sector, given that it is “probably fully valued” right now. However, one name stands out to him as a good play: U.S. food company Kraft Heinz . Morningstar gives the company a five-star rating, and according to Sekera it has a healthy dividend yield and is trading at a 34% discount to Morningstar’s fair value. The financial services firm gives stocks a rating of between one and five stars, with a five-star rating indicating that the shares are undervalued. “The company’s individual costs went up over the past couple of years as inflation was running at a very high rate in the United States. And, to some degree, it lagged in its own price increases,” Sekera said. “As inflation now is moderating, we do think that their price increases can catch up to their costs and get back towards more normalized to historical margins.” Shares in Kraft Heinz dipped last week after it posted fourth-quarter revenue of $6.86 billion, below LSEG consensus estimates . However, its adjusted earnings per share of 78 cents was better than the 77 cents forecast. Over the last 12 months, shares in the Kraft Heinz are down nearly 13%. Of the 23 analysts covering the stock, 11 give it a buy or overweight rating, while 12 have hold ratings. The average price target on the stock is $39.40, according to FactSet data, giving it potential upside of 13.2%. Opportunities in health care The healthcare sector is also “pretty fully overvalued,” but there are pockets of opportunity, Sekera said, naming Medtronic and GSK as two stocks he likes. “Medtronic is a four-star rated stock, trades at a 25% discount, it’s a high-quality company. And our equity team thinks it’s probably one of the best positioned med tech companies, for the continued aging of the baby boomer generation,” he said. Shares in Medtronic are down around 0.45% over the past 12 months. Of the 33 analysts covering the stock, 15 have a buy or overweight rating, 16 have a hold rating and two have a sell rating at a target price of $91.08, according to FactSet data. This implies potential upside of 7.9%. On GSK, Sekera noted that the London Stock Exchange-listed company is trading at a 27% discount. Calling the company undervalued, Sekera said the Morningstar team thinks that the market is “probably overestimating the litigation costs to the company for one of its products by the name of Zantac,” which is used to treat heartburn. Reuters reported that some manufacturers and pharmacy companies halted sales of Zantac in 2019 over concerns that its active ingredient — ranitidine — degraded over time to form NDMA, a chemical that can cause cancer. The company consequently faced several lawsuits, with the most recent one set to go to trial on Feb. 20. This was subsequently dismissed after a confidential settlement was reached, GSK announced on Feb. 1 . Over the last 12 months, shares of the company are up around 12.5%. Of the 23 analysts covering the stock, 11 give it a buy or overweight, 9 have a hold rating and 3 have sell or underweight ratings an average price target of £1,781.77 ($2,110.23), according to FactSet data. This gives it around 6.3% potential upside.
Morningstar strategist names 3 under-the-radar picks for the current ‘stock picker market’
Feb 20, 2024
