Strategist says U.S. stocks are undervalued right now — and names his top picks to buy the dip

Published Wed, May 18 20227:40 PM EDT

Morningstar' s David Sekera thinks the market sell-off is looking overdone — and reveals the tech stocks he thinks are attractive right now, as well as his picks to ride the return of consumer spending. After years of beating the market, tech stocks have been slammed this year as expectations of aggressive tightening by the Federal Reserve drove a rotation out of growth stocks. Earnings disappointments and unfavorable outlooks from some of the biggest tech names have further compounded nervousness in the sector. The broad-based S & P 500 is down around 16% this year, while the tech-heavy Nasdaq Composite has fallen over 25% in the same period. But Sekera, chief U.S. market strategist at Morningstar, believes the market is now in "undervalued territory." "We think the U.S. equity market has fallen far enough and fast enough that we think it has swung too far to the downside in the short term, especially among growth stocks," Sekera told CNBC on Tuesday. He estimated the U.S. market is now trading at a discount of about 15% to what Morningstar deems as fair value. This undervaluation is concentrated in a handful of mega cap stocks that have been decimated this year, namely Alphabet , Amazon , Microsoft and Meta , according to Sekera. "Year to date, the price for each of these stocks has dropped more than the overall market average, yet we remain convinced in the value of these companies for long term investors," he said. Read more David Tepper added to three major tech stocks while selling GM and retail names Tech sell-off is a 'generational buying opportunity' for the 'right' stocks, says analyst Ives The great American consumer is navigating inflation and just may save the economy from a recession Sekera did strike a more cautious tone on Amazon, given some "tough competition" and the effects of the company's mammoth spending during the coronavirus pandemic, but said the market was undervaluing Amazon Web Services. He sees growth in the cloud business and described the company's advertising business as "very valuable." As such, Sekera argues that now is a good time for investors to buy the dip on all four stocks. "We find them all to be attractive at these levels right now," he said. Other opportunities Sekera also sees value in the consumer space, as he bets on a return to normal levels of consumer spending, with "normalization stocks" expected to perform well in the second half of the year. One of Sekera's favorites in this space is ride hailing firm Uber Technologies . He said the company will see an increase in riders and frequency of trips in the coming months, and expects it to achieve positive free cash flow this year, as well as positive earnings in 2024. Sekera believes airline stocks will also benefit from a return in business travel to pre-pandemic levels by 2024. Delta Air Lines and Texas-based travel technology firm Sabre have the "best leverage" to benefit from the return of business travellers, he said. He also likes Carnival as the "best pick" in the cruise line sector, as well as Caesars Entertainment in gaming. Sekera noted that a significant number of high-quality, lower-risk stocks have been caught in the sell-off and could provide an opportunity for investors, especially those stocks with wide "economic moats" — or strong competitive advantages —and lower level of uncertainty surrounding them. "These companies will be best positioned to weather economic disruptions as well as typically have the strongest pricing power to offset inflationary pressures," Sekera said, naming BlackRock , Estee Lauder , Wells Fargo and Honeywell as preferred stock picks.

The New York Stock Exchange stands in lower Manhattan after global stocks fell as concerns mount that rising inflation will prompt central banks to tighten monetary policy on May 11, 2021 in New York City. By mid afternoon the tech-heavy Nasdaq Composite had lost 0.6% after falling 2.2% at its session low.

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