June 13, 2024

The Art of Investment

Mastering the Stock Market Strategies

The 10 Best Companies to Invest in Now

8 min read

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—May 2024

The 10 most undervalued stocks from our Best Companies to Own list as of April 29, 2024, were:

  1. Yum China YUMC
  2. Roche Holding RHHBY
  3. Polaris PII
  4. British American Tobacco BTI
  5. Pfizer PFE
  6. Imperial Brands IMBBY
  7. Ambev ABEV
  8. Rentokil Initial RTO
  9. Anheuser-Busch InBev BUD
  10. Gilead Sciences GILD

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 April 29, 2024.

Yum China

  • Price/Fair Value: 0.50
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Restaurants

Yum China’s stock is 50% undervalued relative to our fair value estimate of $80 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 USD 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.

Roche Holding

  • Price/Fair Value: 0.55
  • Morningstar Uncertainty Rating: Low
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Drug Manufacturers—General

Roche is the first of two 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 45% below our fair value estimate of $55 per share.

Polaris

  • Price/fair value: 0.60
  • Fair value uncertainty: Medium
  • Capital Allocation Rating: Exemplary
  • Industry: Recreational Vehicles

Polaris stock trades 40% below our fair value estimate of $145. 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.

British American Tobacco

  • Price/Fair Value: 0.60
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Tobacco

British American Tobacco stock is trading 40% 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, with exposure to several emerging categories, 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.

Pfizer

  • Price/Fair Value: 0.61
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Drug Manufacturers—General

A household name among drug manufacturers, Pfizer’s stock is currently trading at a 39% discount to its fair value estimate. The company’s large size gives it significant competitive advantages in developing new drugs, and its diverse portfolio of drugs helps insulate the company from any one particular patent loss, says Morningstar director Damien Conover. Pfizer reported fourth-quarter earnings ahead of our expectations, largely because of lower-than-expected research-and-development spending. In our view, the market likely doesn’t fully appreciate Pfizer’s cost-cutting program, recently launched drugs, and the potential of its pipeline. We think Pfizer stock is worth $42 per share.

Imperial Brands

  • Price/Fair Value: 0.65
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Tobacco

The second Big Tobacco company on our list of the best companies to buy now, Imperial Brands stock trades 35% below our fair value estimate of $36 per share. Morningstar’s Inton says Imperial Brands is a fast follower, rather than a leader. This makes Imperial a different investment proposition than its Big Tobacco peers, which is investing in growth and moving away from the secular decline of the cigarette industry. Imperial, on the other hand, is likely to be the company more exposed to cigarettes. Although it should trade at a discount to its peer group, Imperial should remain a highly profitable and cash-generative business.

Ambev

  • Price/Fair Value: 0.66
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Beverages—Brewers

Ambev stock trades 34% 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 senior equity analyst 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.

Rentokil Initial

  • Price/Fair Value: 0.67
  • 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 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 equity 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 33% discount to our fair value estimate of $39.50 per share.

Anheuser-Busch InBev

  • Price/Fair Value: 0.67
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Beverages—Brewers

Anheuser-Busch InBev has built a vast global scale and regional density through past acquisitions like Grupo Modelo and SABMiller. AB InBev has a history of buying brands with promising growth platforms and then expanding distribution while squeezing costs from the businesses, which contributes to its Capital Allocation Rating of Exemplary. AB InBev’s worldwide scale and distribution is massive: Its top 20 brands each generate more than $1 billion per year in sales. Vast global scale and its monopolylike positions in Latin America and Africa give AB InBev significant fixed-cost leverage and procurement pricing power, argues Morningstar’s Pontikis. We think there’s plenty of upside with the stock for patient investors. AB InBev stock trades 33% below our fair value estimate of $90 per share.

Gilead Sciences

  • Price/Fair Value: 0.68
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Drug Manufacturers—General

Rounding out our list of the best companies to buy now is drug manufacturer Gilead Sciences, which is trading 32% 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.

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.

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