The large caps category as a whole is being overvalued. That does not mean that there are no investment opportunities available.
Especially in certain sectors there are interesting stocks to find, which can be bought at attractive discounts.
This is based on the ‘Large Cap Global Core Pick List’, written by Morningstar. Large cap stocks are stocks with a large market capitalization.
For a monthly stock list, Morningstar uses their analysts to track and list attractive global large caps, which have the characteristics of a ‘Narrow’ or ‘Wide Moat’ which are companies with a competitive advantage in the long run. Furthermore, shares only make it to the list when there is an undervaluation.
The main focus on the list are attractive and undervalued large caps from the US and widely traded stocks which are available on the American market.
Bargains in health sector
The list as a whole trades at a substantial discount to the market. Average valuation of 89 percent of the fair values as calculated by Morningstar. This is mainly due to some sectors scoring well-below their fair value. The health sector has the biggest discounts, with a score of 80 percent compared to the fair value.
In the consumer goods sector, Ralph Lauren and Mattel take the spotlight, instead of Twenty-First Century Fox and Viacom, which were previously regarded as top-quality.
"Mattel gets a Narrow Moat rating because the licensing agreements with big names in the entertainment industry. It also has a large market share. Through this strong position Mattel can easily enter into new licensing alliances. The company has the broadest reach and deep pockets in order to put in a lot of marketing money. For beginners, it is difficult to enter this market, "says Jaime Katz, an analyst at Morningstar.
Cost benefits Wal-Mart
In the consumer staples sector, Imperial Brands, Ambev and Estee Lauder went down in popularity while Wal-Mart, Anheuser-Busch InBev and Heineken took their place.
Analyst Erin Lash about Wal-Mart: "It is the largest retailer in the world and get a wide moat rating because of the enormous scale that purchasing power and cost benefits entails a result can handle the low retail prices and in addition, the logistics is organized very efficiently. which further contributes to the favorable cost. "
Lash adds that Wal-Mart is an attractive partner for suppliers because of the sheer volume, which makes it possible to put a great amount of products directly into the market in a way unmatched by any other retailer.
In the health sector, Bayer only need to clear the field, which is an advantage for Sanofi. Sanofi is currently more attractive and appreciate, according to analyst Damien Conover.
"The product range includes multiple leading drugs can not just imitate the competition, even if the patent expires." One such drug is insulin Lantusm means that, according to Conover is clearly better than other insulins. "A generic producer can there not just here in front put a competitive product." In addition, Sanofi has plenty of other strong products in the range, says the analyst.
A lot of changes are also happening in different sectors. This month Arconic and Canadian Pacific Railway are disappearing in the industrial sector. Raytheon and Royal Philips will be taking over their places.
In the information technology sector Skyworks Solutions disappears because the share price of the company has almost reached fair value. Qualcomm replaces them on the list.
In the real estate industry Well Tower is almost at fair value. Therefore the share gives way to Vornado Realty Trust. In the utilities sector FirstEnergy will coming on the list this month, at the expense of Duke Energy.
American or European shares?
As stated before, the lists of undervalued discounted shares are mostly based on American shares. However, to give you a good overview of the European shares, these are reasons to also look into Europe.
A good investment portfolio is well diversified in terms of sectors and regions. But due to the US stock markets hitting record highs, it may also be worthwhile to focus on European companies.
European stocks are doing fine in 2017. IShares MSCI Germany ETF has gained about 12% since December 1, while the Vanguard ETF Europe, in the same period, gained approximately 9%. Of course, past performance is no guarantee of future results, but the recent strength in terms earnings does show that the increase is justified.
Profit and sales growth
A recent note from J.P. Morgan showed that average earnings growth of companies in the Stoxx Europe 600 is 10%, and is positive in nine out of the ten sectors. The sales are surprisingly positive, according to the analysts.
The S&P 500 recently reached the highest price-earnings ratio since 2004. European stocks were left for dead after the European Brexit, and in junethe gap between the S&P 500 and Stoxx Europe 600 was the highest since 2011.
Long-term gains and diversification
Eventhough the European market has been relatively volatile since the Brexit and with other countries second guessing the Eurozone, it is always smart to diversify your portfolio in terms of regions. It is unlikely that the Eurozone will fall apart in the coming months and if you share the same confidents, you could use Europeans stocks as a hedge if the portfolio mainly consists of US mega caps. The reason for this is that the US market has also been relatively volatile and very uncertain, with potential regulations coming up from president Trump.