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December 17, 2021 at 01:43 PM
Related: 13 Stocks That Look Overvalued but Aren’t: Morningstar
Investors who expect U.S. technology, real estate and energy stocks to continue posting strong gains next year are having to sort through these sector stocks to find opportunities, as many were big winners in 2021.
Technology and real estate stocks are largely overvalued, making it especially hard for stock investors to find reasonably priced ones in the sectors, according to a Dec. 16 blog post by Jakir Hossain, associate markets data journalist at Morningstar.
One-third of tech stocks covered by Morningstar analysts are overvalued, and roughly 45% are deemed fairly valued. Likewise for real estate stocks, with one-third overvalued and more than half fairly valued.
Energy stocks, however, remain largely undervalued based on Morningstar’s metrics, Hossain wrote.
To give investors a helping hand, Morningstar screened through its coverage list and found three stocks in each sector that analysts believe have room to run.
Sector Performance
Over the course of 2021, rebounding oil demand and a 46% rise in oil prices have fueled the rally in energy stocks. The Morningstar Energy Index is up 52.5% this year, a sharp turnaround from the 33.1% loss in 2020.
Many technology companies, meanwhile, have benefited from the coronavirus pandemic business environment and extended their 2020 rally, though at a slower pace. The Morningstar Technology index is up 34.4% this year following a 48% return in 2020.
Real estate stocks are posting a 32.4% return as the economy emerges from the pandemic-driven recession after having lost 4.2% in 2020.
Among other sectors, financial services stocks are returning 26.2%, narrowly beating out the U.S. market, which is up 24.1% as 2021 winds down. Basic material stocks had a strong year thanks to rising commodity prices, returning 25.4% so far in 2021.
Hossain noted that most sectors remain overvalued as they were a year ago, but a few became significantly more overvalued.
Real estate is currently the most overvalued sector in the market, with stocks on average trading at a 19% premium to their Morningstar fair value estimate. Energy remains the most undervalued sector, trading at a 13% discount to fair values on average, down from their 30% discount last December.
Communication services stock valuations had the largest change over the year. The sector now trades at a broad 6% discount, compared with a 17% premium a year ago.
Best Sector Opportunities
Analysts screened Morningstar’s U.S. coverage universe of 859 stocks to find the best entry points for the technology, energy and real estate sectors. They started by filtering for stocks trading at a 5- or 4-star Morningstar rating.
Of those, they selected from stocks with the lowest price/fair value ratios to allow for the largest margin of safety for investors. The result was three undervalued stocks for each of the best-performing sectors.
See the gallery above for the nine undervalued stocks selected by Morningstar analysts.
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