Market Insight: A contrarian view on Wall Street | REUTERS
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with Wall Street dominated by a handful
of stocks how can investors find Value
welcome to Market inside I’m David
polard the S&P 500 has retreated from
its records but despite that 10 stocks
accounted for 98% of the Market’s return
this year according to data provided to
us by Morning Star so in this
environment how can investors find
opportunity well let’s ask morning
star’s chief us strategist David Saka
welcome David many thanks for joining us
today first in your notes you say
investors need to take a contrarian
approach and look at what you call the
three ‘s what does that mean and why
should investors track
them oh exactly so really when I look at
our valuations you know what’s what
they’re telling me is that what’s worked
for the past one and a half years is
probably not going to be what works
going forward so just as a little bit of
background you know coming into 2023
when I look at the Magnificent Seven
stocks you know six of those were rated
either four stars or five stars meaning
we thought that they were undervalued to
significantly undervalued they’ve all
now run up to the point where you know
five of them are now trading in Fair
Value territory one is undervalued and
one is now overvalued and as you
mentioned the market is still very
concentrated and when we look at those
top 10 stocks you half of them are three
stars and the other half are actually
two stars meaning we think that they’ve
run up you know too far at this point
and then when I look at like the obvious
AI plays you know they’re all either at
fair value or overvalued so I do think
investors really should start looking
more for contrarian plays you know
specifically looking at what we’re
calling the three use you know those
stocks that have underperformed and are
unloved and of course most importantly
undervalued well on that basis you’ve
highlighted certain sectors you think
should be looked at basic materials real
estate utilities and energy let’s focus
on materials particularly gold miners
gold is at record highs miners have also
risen in tandem so is it rather too late
to buy those
stocks I don’t think so in fact you know
if you look at like the GDX I think
that’s only upu slightly under 5% year
to date over the past you know 52 weeks
I think it’s actually down 4% now what I
really like about the gold miners is we
actually have a bearish long-term view
on the price of gold itself you know in
our financial models for the companies
we follow you know we’re only looking at
$2,300 an ounce for 2024 through 2026 in
our forecast but then we bring that
value down and we look for the spot
price of gold over the long term to fall
all the way down to
1,780 an ounce yeah even with that
bearish view on the price of gold in and
of itself you know a couple of different
stocks really stand out to us as being
undervalued so the first one I’d
highlight is going to be numont mining
it’s a fourstar rated stock trades it at
23% discount to fair value provides a
2.6% dividend yield and and then baric
is the other one that’s also a fourstar
rated stock trades at about a 20%
discount 2.3% dividend yield so in my
view you know if gold stays here or even
moves any higher I think there’s a lot
of upside leverage left in these stocks
worst case scenario if gold does move
back down to our forecast we still think
that you’re buying them at a very large
margin of safety let’s look at real
estate given the problems with
commercial real estate shouldn’t risk
adverse investors stay clear of that as
well
you know real estate is really probably
the most hated asset class on the street
and it’s been the most hated asset class
you know for a while and I think that
negative sentiment is what’s really
driving the opportunity here so when we
look at the sector overall it’s trading
at about 177% discount to a composite of
Our Fair values now personally I would
still steer clear of urban office space
that is an area that maybe it’s
undervalued but you I think it can still
get even further undervalued before it
bottoms out but specifically we like a
lot of the more defensive real estate
plays you and also look for those
companies that already have long-term
financing in place and so they won’t be
as volatile with interest rates you know
moving up here in the short term you
know two picks I’d like here are in the
health care sector there’s ventas that’s
a five star rated stock trades at a 40%
discount to our fair value pays about a
6.6% dividend yield and then Health Peak
is the other health care one that we
like that’s also a five-star rated stock
at a 40% discount and then one other
area that we think has some pretty good
defensive character characteristics is
going to be the cell phone towers so our
pick there is crown castle a fourstar
rated stock at a 27%
discount and what about utilities again
unloved but for a reason perhaps that
there’s no reasonable rate of return
when compared with other
sectors so utilities trades at about a
5% discount to fair value doesn’t sound
like a lot but utilities really rarely
trade at that much of a discount when
you look at you how they’ve traded over
the past you know 14 or 15 years you we
think the sector just sold off you know
too much last fall as interest rates you
know were going up a lot of people do
use utilities as a fixed income
substitute and fundamentally when I
talked to our analysts on our team you
know they just note that the outlook for
the utility sector is good as they think
they’ve ever seen it you we have the
transition to Renewables the investment
from the government in the electric grid
a lot of investment in infrastructure so
a lot of good growth prospects for that
sector you know two stocks that we like
here are going to be Entergy that’s a
fourstar rated stock that trades at a
133% discount yeah that’s the company
that our team thinks just has the best
combination of valuation growth and
yield and the other one I’ll highlight
is wec energy another fourstar rated
stock at a 15% discount you know and
that’s one where they think that you
know where they operate are is in a very
supportive regulatory environment and
that they have a very strong management
team okay David we’ll leave it there
David sakera Chief US market strategist
at Morning Star many thanks for sharing
your analysis with us us today and that
is your Market Insight you can watch
more videos on reuters.com
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According to Morningstar, just ten stocks accounted for 98% of US market returns this year, with investors feverishly focused on artificial intelligence. Morningstar Chief US Strategist
David Sekera gives a contrarian view on where to find value. Gold miners, real estate and utilities are among his picks.
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