Top Morningstar strategist tells investors to sell these 6 'overvalued' stocks — and names 5 to buy

Published Tue, Aug 15 20238:04 PM EDT

Despite last week's selloff, the strong rally this year means U.S. markets are now trading at only a small discount compared with the start of the year, says top Morningstar strategist Dave Sekera. The chief U.S. market strategist told CNBC's " Squawk Box Asia " on Monday that he expects returns to be "much more muted" for the rest of the year. The S & P 500 has risen 18% this year, while the Nasdaq composite has soared 32%. Following the gains this year, U.S. stocks are trading at only a 4% discount to their fair value — compared to the "substantial discount" at the start of 2023, Sekera said. In fact, now's a good time to be selling and locking in profits on some stocks that have "run up so much [they] are now overvalued and overextended," he said. He named six such stocks: Nvidia , Tesla , Oracle , Netflix , Apple , and Eli Lilly . Tech stocks in particular have made strong gains this year, driven by the so-called "magnificent seven" group of Nvidia, Tesla, Apple, Microsoft, Alphabet, Meta and Amazon. Stocks to buy Still, Sekera said, there are opportunities in some stocks that investors can get into. He names five that he likes and that are still trading at a discount to their fair value. Cognizant Technology : Sekera said this global IT services firm is set to be a beneficiary of not just the long-term trend of digital transformation but also artificial intelligence. It's trading at a 25% discount, according to Morningstar. U.S. Bancorp : Sekera said this stock is one of Morningstar's top picks among U.S. regional banks, which have "sold off too much" after the Silicon Valley Bank crisis earlier this year. He said although the regional bank model is under stress, it's "not permanently broken." "Funding costs are higher and earnings will decline next 3 quarters before bottoming out and rebounding," he said. Jacobs Solutions : This engineering services firm is still 13% undervalued, Sekera said, adding that positive momentum for the company is set to continue in 2024. "We do have a lot of infrastructure spending that's just starting to roll out from the Inflation Reduction Act," Sekera said. American Tower : This REIT, which owns cell phone towers, is trading at a 18% discount, Morningstar said. Stocks in this area have "just gotten beaten up too much," Sekera said. But they beat consensus estimates on their revenue and earnings per share, he noted. "So I think the stocks are falling out more than enough at this point," he said. RTX Corp : While shares of this aerospace and defense company dropped after reports that its Pratt & Whitney engines must be inspected for microscopic cracks, markets are overreacting, according to Sekera. He noted the company's strong bookings and resupply contracts, adding that it's trading at a 23% discount.