1. Basic Materials

About 20% of the basic-materials stocks Morningstar covers are undervalued, reports senior analyst Seth Goldstein. The most attractive opportunities in the sector are in the agriculture and chemicals industries.

Compass Minerals (CMP), DuPont (DD), Nutrien (NTR)

(Photo: Shutterstock)

2. Communication Services

A sharp uptick in online advertising demand near year-end drove up valuations for online platforms. As a result, traditional media and telecom stocks look the most attractive from a valuation perspective, says Mike Hodel.

Fox (FOXA), Lumen Technologies (LUMN), Omnicom Group (OMC)

(Photo: Shutterstock)

3. Consumer Cyclical

The sector was hurt by shelter-in-place mandates at the pandemic’s onset, but extra disposable income and a rise in e-commerce have since advanced consumer cyclical gains, says director Erin Lash. Still, Morningstar expects the department store channel erosion to persist and a preference for local travel to continue into 2021. Modest values exist in the auto and restaurant industries.

Hanesbrands (HBI), Macy’s (M), Tapestry (TPR)

(Photo: Shutterstock)

4. Consumer Defensive

The pandemic has prompted a shift toward e-commerce for undervalued consumer packaged goods, where penetration has languished for some time," says Lash. This recent uptick reinforces Morningstar’s expectation that e-commerce will rise to a mid-single-digit level of consumer-packaged-goods sales in the next few years.

Coca-Cola Femsa (KOF), Kellogg (K), Pilgrims Pride (PPC)

(Photo: Shutterstock)

5. Energy

The energy sector is the most undervalued by Morningstar’s metrics, says director Dave Meats. Morningstar still anticipates near-total recover in crude demand when the pandemic abates in 2021, but Meats acknowledges that the time of the recovery remains uncertain. Morningstar expects to see consumption at near pre-pandemic projections by 2023.

Enterprise Products Partners (EPD), Pioneer Natural Resources (PXD), Schlumberger (SLB)

(Photo: Shutterstock)

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6. Financial Services

The sector is overvalued, says director Michael Wong. Morningstar expects earnings in 2021 to grow for nearly all financial industries. Wong says the exception may be capital markets, as trading and investment banking revenue remained strong in 2020.

American International Group (AIG), Berkshire Hathaway (BRK.B), Wells Fargo (WFC)

(Photo: Shutterstock)

7. Health Care

Morningstar’s analysis suggests the sector is overvalued. It continues to see the most undervalued companies in the drug manufacturer and managed-care industries. Drug companies may end the pandemic with vaccines, thereby generating goodwill they can potentially use to support overall drug pricing.

Biogen (BIIB), BioMarin Pharmaceutical (BMRN), CVS Health (CVS)

(Photo: Shutterstock)

8. Industrials

Although the sector lagged the broader market in 2020, few industrial stocks are undervalued today, says sector director Brian Bernard. Pockets of opportunity exist among aerospace and defense companies. The incoming administration’s promised infrastructure plan would be a boon for construction-oriented industrials.

Lockheed Martin (LMT), Roper Technologies (ROP), Wesco International (WCC)

(Photo: Shutterstock)

9. Real Estate

Real estate significantly lagged the broader market in 2020, with subsectors more sensitive to pandemic effects — including hotels and malls — suffering most, says analyst Kevin Brown. Morningstar expects hotels and malls to rebound and enjoy strong growth for several years after the crisis ends.

Regency Centers (REG), Simon Property Group (SPG), Ventas (VTR)

(Photo: Shutterstock)

10. Technology

Morningstar considers the overall technology sector significantly overvalued, says director Brian Colello. Buying opportunities are rare. Independent of valuation, Morningstar is especially fond of moaty software businesses, as they generate revenue on a subscription basis with little risk of cancellations.

Intel (INTC), Splunk (SPLK), VMware (VMW)

(Photo: Shutterstock)

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11. Utilities

Morningstar expects renewable energy to be the theme for 2021 and beyond, says strategist Travis Miller. But valuations remain rich for the highest-quality utilities with the best earnings and dividend growth. Less obvious beneficiaries of the renewable energy movement with strong balance sheets and solid dividends offer the best opportunities.

American Electric Power (AEP), Edison International (EIX), First Energy (FE)

(Photo: Shutterstock)

Related: Bob Doll’s 10 Predictions for 2021

U.S. stocks recovered from the selloff in February and March, finishing 2020 with a 16% return, as measured by the S&P 500.

Today, Morningstar considers stocks overvalued, Susan Dziubinski, director of content for Morningstar.com, wrote in a blog post this week, noting that the median stock in the firm’s North American coverage universe traded at a 6% premium to the research firm’s fair value estimate at year-end.

According to David Sekera, Morningstar’s chief U.S. market strategist, only 18% of the stocks the firm covers have Morningstar Ratings of 4 or 5 stars.

In aggregate, energy and real estate stocks look undervalued, while the technology sector is the most overvalued.

See the gallery above for 33 specific undervalued stocks across sectors that are among Morningstar analysts’ best ideas, according to Dziubinski.

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