Morningstar Spots Bargains: Kraft Heinz, Medtronic, GSK Shine

Key Takeaway

• Morningstar highlights Kraft Heinz, Medtronic, and GSK as under-the-radar picks in a 'stock picker market', with significant discounts to fair value.
• Kraft Heinz trades at a 34% discount with potential upside of 13.2%, despite recent dip in shares after Q4 earnings report.
• Medtronic and GSK offer potential upsides of 7.9% and 6.3%, respectively, identified for their strong positioning and undervaluation amidst overvalued sectors.

Unearthing Gems in a Volatile Market: A Deep Dive into Selective Investment Opportunities

In a financial landscape where the S&P 500 index has recently breached the 5,000 threshold, investors find themselves at a crossroads, navigating through a maze of valuation challenges and market uncertainties. The current climate, rife with political tensions and speculation over the U.S. Federal Reserve's next moves on interest rates, has been aptly dubbed a "stock picker's market." This term, emphasized by Morningstar's chief markets strategist, David Sekera, underscores the critical importance of discerning investment in sectors that, while presenting valuation hurdles, also offer promising growth prospects.

Sectoral Spotlight: Deciphering Consumer Defensive and Healthcare

The Case for Kraft Heinz in Consumer Defensive

In the realm of consumer defensive stocks, skepticism abounds, primarily due to the sector's lofty valuations. However, Kraft Heinz emerges as a beacon of opportunity, distinguished by a five-star rating from Morningstar. The company's current trading price, which is at a 34% discount to Morningstar’s fair value estimate, signals a compelling entry point for investors. This valuation comes in the wake of a slight dip in Kraft Heinz's shares, following a fourth-quarter revenue announcement of $6.86 billion that did not meet LSEG consensus estimates. Despite this, the company's adjusted earnings per share exceeded expectations. With an average price target of $39.40, Kraft Heinz is poised for a potential 13.2% upside, leveraging moderating inflation to realign pricing with costs and revert to historical margin norms.

Healthcare Highlights: Medtronic and GSK

The healthcare sector, largely perceived as overvalued, harbors hidden gems in Medtronic and GSK, both of which are ripe for investment consideration. Medtronic, with its stronghold in the medical technology arena and its pivotal role in catering to the needs of the aging baby boomer demographic, is trading at a 25% discount. Morningstar awards it a four-star rating, signaling robust confidence in its growth trajectory. GSK, meanwhile, stands out for its undervaluation, trading at a 27% discount, largely due to overblown litigation fears surrounding its heartburn treatment, Zantac. Despite facing numerous lawsuits, a recent settlement has potentially laid the groundwork for a positive outlook on the stock, which has already appreciated by 12.5% over the past year.

Investment Insights: Navigating the Market with Precision

The investment landscape, as highlighted through the lens of Kraft Heinz, Medtronic, and GSK, presents a compelling narrative for investors steering through the current market's volatility. These companies not only offer a buffer against the overarching valuation concerns but also underscore the importance of meticulous stock selection. The potential for significant returns, as delineated by analyst ratings and price targets, accentuates the essence of a nuanced, individualized approach to investing in a market environment dominated by broader sectoral and economic uncertainties.

In essence, the journey through today's stock picker's market is fraught with challenges, yet it is also laden with opportunities for those willing to delve deeper into the intricacies of individual stocks and sectors. The insights from Kraft Heinz, Medtronic, and GSK serve as a testament to the potential rewards of such a discerning investment strategy, offering a beacon of hope for investors navigating the tumultuous waters of the current financial landscape.

STREET VIEWS

• David Sekera, Chief Markets Strategist at Morningstar:

  “It’s always a stock picker’s market,” but that this is even more pertinent this year. “We can look at individual stocks across several themes over the past couple of years to see which stocks have really been the ones that have outperformed the broader market,” “The company’s individual costs went up over the past couple of years as inflation was running at a very high rate in the United States. And, to some degree, it lagged in its own price increases,” “As inflation now is moderating, we do think that their price increases can catch up to their costs and get back towards more normalized to historical margins.” "Medtronic is a four-star rated stock, trades at a 25% discount, it’s a high-quality company. And our equity team thinks it’s probably one of the best positioned med tech companies, for the continued aging of the baby boomer generation," "The London Stock Exchange-listed company is trading at a 27% discount...the Morningstar team thinks that the market is probably overestimating the litigation costs to the company for one of its products by the name of Zantac,"