Top Morningstar strategist says stocks are undervalued by 15% and shares 6 favorites

Published Mon, Nov 14 20227:11 PM ESTUpdated Tue, Nov 15 20229:36 AM EST

With many stocks in a bear market, equities could be undervalued by 15%, according to Morningstar's chief U.S. strategist. Dave Sekera told CNBC last week that markets are overestimating the impact of inflation on the U.S. economy, leaving many stocks below their fair value. "We actually think the U.S. market is pretty undervalued here, trading at about a 15% to 20% discount to fair value," he said Thursday, although his comments were before the 5.5% jump in the S & P 500 later that day. "I think the market is probably overestimating just how much of a stagnant environment we're going to be in for the economy and still pricing in inflation much longer than what we see." The S & P 500 rallied 5.9% last week for its best week since June , although stocks fell slightly Monday. Sekera believes multiple headwinds facing the economy that were present earlier in the year will start to recede at the beginning of next year, including energy prices and interest rates. "With the economy being relatively sluggish, that could give the Federal Reserve the room it would need, not only to stop making monetary policy tighter, but switch gears in the second half of the year and start to loosen monetary policy," he added. In such an environment, Morningstar's Sekera believes the following six companies with a "wide economic moat" will have the pricing power needed to pass through cost increases and maintain profit margins. Compass Minerals tops the list, with shares expected to rise by 81.8% to $80 over the next 12 months. It is currently trading at $44. The small-cap company produces deicing salt from the world's largest salt mine in Ontario, Canada. According to Morningstar, the mining company has access to a deep-water port which enables it to ship its products at a lower cost than competitors. Medical device maker Zimmer Biomet and technology companies ServiceNow , Salesforce and Amazon also featured on the list, with Morningstar expecting most to rise by at least 50% from their current share prices. It gives Zimmer Biomet 51.4% potential upside, Amazon upside of 48%, Salesforce 52% upside, ServiceNow upside of 57%. Morningstar analysts also believe 3M is a "cheap stock" trading at $133 and expect shares to rise by 37.6% to $183. Senior analyst Joshua Aguilar maintained his price target for the company despite it pointing toward multiple headwinds in its third-quarter earnings.