Stock Market Outlook: A Dearth of Opportunity Amid the Rally –

4- and 5-star stocks are harder to come by in today’s market, but a few stock-specific stories are still out there.

By Elizabeth Collins, CFA | 12-27-17 | 06:00 AM | Email Article
  • The Morningstar Global Markets Index has returned more than 23% over the past year.
  • The market-cap-weighted price/fair value ratio for our equity analysts’ coverage universe is 1.06.
  • Communication services is the most undervalued sector, with a price/fair value ratio of 0.93. Basic materials is the most overvalued sector, with a price/fair value ratio of 1.39.


Although communication services does stand out as the most undervalued sector when looking at price/fair value of the companies we cover, we don’t have any 5-star ratings on communication services companies, and in fact only 12 companies in this sector sport a 4-star rating.This speaks to the overall dearth of 5-star or even 4-star opportunities we see today. That said, one of the most important stories we’re telling about the communication services sector is that  China Mobile is undervalued, based on our expectations for market share gains and the competitive benefits of the industry shift to 4G. The Chinese telecom market is one of our analysts’ favorites in the region, with organic growth stemming from favorable consumption growth over the next 10 years.Another stock-specific story we’re telling is for  Wells Fargo , although we don’t see the financial services sector as being particularly undervalued overall when looking at price/fair value. (In fact, the financial services sector’s market-cap-weighted price/fair value ratio is about 1.04.) Our analysts argue that the market is overlooking Wells Fargo’s high-quality deposit base and continued ability to produce high returns on assets.More broadly speaking, the most emphatic message from our coverage universe is that the basic materials sector is overvalued. The miners we cover are particularly overvalued, reflecting our expectation of a structural change in demand growth from China as its economy matures and transitions toward less commodity-intensive economic growth.Take  BHP Billiton , which is trading at a roughly 45% premium to our fair value estimate. The company’s future profits will be determined primarily by prices for iron ore, copper, and metallurgical coal. In addition to the shift away from China’s commodity-intensive economic growth, these metals are likely to suffer from the bearish forces of rising scrap availability, which will add material amounts of supply to the market.In the reports below, get our sector-by-sector take on the biggest themes and the best remaining opportunities today. Quarter-End InsightsCredit Market Insights: Flattening Yield Curve Impacts Performance
Basic Materials: The Most Overvalued Sector We Cover
Energy: A False Sense of Security for Oil MarketsAnd stay tuned Thursday and Friday for our take on the biggest themes and best opportunities in communication services, consumer cyclical, consumer defensive, financials, health care, industrials, real estate, tech, and utilities.

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