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The U.S. stock market finished the third quarter of 2023 down about 3%, as measured by the Morningstar US Market Index. The index is up nearly 13% this year through the end of September.

Heading into the fourth quarter of 2023, stocks look undervalued, according to our metrics: Looking at a composite of the stocks Morningstar covers, the U.S. stock market is trading at a price/fair value of 0.92, which translates to an 8% discount to our fair value estimate at the end of the third quarter. That’s compared with a 16% discount to fair value at the start of 2023.

“Between the market pullback and raising our fair value estimates on a handful of stocks, the market is now back to trading at an attractive discount,” writes Morningstar chief U.S. market strategist David Sekera in his fourth-quarter 2023 stock market outlook.

Here’s how stock market valuations look through a few different lenses:

  • By investment style, small-value stocks are the most undervalued stocks right now, trading 38% below our fair value estimate. Meanwhile, large core stocks are 2% overvalued.
  • By sector, energy stocks are 3% overvalued while all other sectors look undervalued. The most undervalued sector heading into the fourth quarter is real estate, trading 21% below our fair value estimate.
  • By Morningstar Economic Moat Rating, which is a sign of a company’s competitive advantages, wide- and narrow-moat stocks are undervalued by 7% each while no-moat stocks are 18% undervalued.

33 Undervalued Stocks for Q4 2023

Here’s the list of Morningstar’s top underpriced stock picks for the fourth quarter of 2023.

  1. Albemarle ALB
  2. Anheuser-Busch InBev BUD
  3. Charles Schwab SCHW
  4. Cognizant Technology Solutions CTSH
  5. Corteva CTVA
  6. Devon Energy DVN
  7. Duke Energy DUK
  8. Entergy ETR
  9. Equitrans Midstream ETRN
  10. Estee Lauder EL
  11. Federal Realty Investment Trust FRT
  12. Hanesbrands HBI
  13. Illumina ILMN
  14. International Flavors & Fragrances IFF
  15. Johnson Controls JCI
  16. Kraft Heinz KHC
  17. ManpowerGroup MAN
  18. Moderna Therapeutics MRNA
  19. NiSource NI
  20. Nordstrom JWN
  21. Norfolk Southern NSC
  22. Park Hotels & Resorts PK
  23. PayPal Holdings PYPL
  24. Pinterest PINS
  25. Snowflake SNOW
  26. Teradyne TER
  27. TC Energy TRP
  28. VF VFC
  29. Ventas VTR
  30. Verizon Communications VZ
  31. Walt Disney DIS
  32. Wells Fargo WFC
  33. Zimmer Biomet ZBH

Here’s a brief summary of how valuations stack up across sectors, along with some key Morningstar metrics about each undervalued stock pick. Individual stock data is as of Sept. 29, 2023.

Undervalued Basic-Materials Stocks

Basic-materials stocks underperformed the broader market during the third quarter and are coming into the fourth quarter about 13% undervalued. Morningstar strategist Seth Goldstein reports that 60% of the stocks that Morningstar covers in the sector are trading with Morningstar Ratings of 4 or 5 stars. While building-materials stocks remain overvalued, more than half of the stocks in the agriculture, chemicals, forest products, and metals and mining industries are underpriced.

Underpriced Communications-Services Stocks

The communication-services sector notched a 30% gain through September, handily outpacing the broader market. Yet the sector is trading 19% below our fair value estimate. While heavyweights Meta Platforms META and Alphabet GOOGL have soared, there is still plenty of opportunity in the sector, observes Morningstar sector director Mike Hodel. In fact, more than two thirds of the stocks we cover in the media, interactive media, and telecom subsectors are trading in the 4- and 5-star range.

Cheap Consumer Cyclical Stocks Today

Consumer cyclical stocks have far outperformed the broader market in 2023, with gains of 24%—though they did lose more than the market during the third quarter. The sector is trading 9% below our fair value estimate coming into the fourth quarter. About half of the stocks that we cover in the sector are trading in 4- and 5-star range, says Morningstar sector director Erin Lash. Opportunities abound in apparel, autos, and travel, specifically.

Undervalued Stocks in the Consumer Defensive Sector

Consumer defensive stocks have lagged the market this year, down 3% for year-to-date return through September. The sector looks about fairly valued today. Yet there are opportunities to be found, says Lash: In particular, roughly 36% of the stocks we cover in the consumer packaged goods industry are trading in the 4- and 5-star range.

Underpriced Energy Stocks Right Now

Energy stocks finished the first half of 2023 in the red but bounced back during the third quarter as oil prices rose. The sector looks about 3% overvalued heading into the fourth quarter, after trading below our fair value estimate for much of the year. Opportunities are few and far between, says Morningstar sector strategist Stephen Ellis.

3 Undervalued Stocks to Buy in Q4 2023

Undervalued Stocks: Financial Services

Although the financial services sector bounced back some from its year-to-date lows after the regional banking crisis, the sector’s return is just 1% for the year through September. The sector is 11% undervalued going into the new quarter. About half of the financial services stocks we cover are trading at 4- and 5-star levels, notes Morningstar sector director Michael Wong, with the most opportunities among the credit services firms and banks.

Top Cheap Healthcare Stocks

Healthcare stocks have lost ground in 2023 and are only trading 4% below our fair value estimates today. Opportunities do exist, though, particularly among healthcare plans, providers and services, and diagnostics and research, reports Morningstar sector director Damien Conover. The biopharma industry includes the most 5-star stocks.

Inexpensive Industrials Stocks

Industrials stocks slid nearly 5% during the third quarter and look slightly undervalued today. Morningstar sector director Brian Bernard reports that all of the conglomerates we cover look undervalued. And more than one third of the names in the business services and aerospace and defensive industries are trading in the 4- and 5-star range.

Overlooked Real Estate Stocks

Real estate stocks continue to underperform the market this year and now trade at a 21% discount to our fair value estimate. More than two thirds of the names in the sector are trading in either the 4- or 5-star range. Rising interest rates have stifled the sector’s performance despite strong fundamental growth, says Morningstar senior equity analyst Kevin Brown.

Undervalued Technology Stocks Today

After soaring more than 40% in 2023′s first half, technology stocks gave back some of those gains during the third quarter. After the retreat, the tech sector looks about 2% undervalued. Morningstar senior analyst Dan Romanoff says there are still some select buying opportunities in semiconductors, hardware, and software, though the median stocks in each of those industries are about fairly valued.

Underpriced Stocks: Utilities

Utilities are having a tough 2023, down more than 14% through the first half of the year; the sector is 9% undervalued heading into the fourth quarter. About two thirds of the stocks in the sector are trading in buying range. We expect 8%-10% long-term returns for utilities investors now that valuations have corrected, say Morningstar sector strategists Travis Miller and Andrew Bischof.

How to Find Undervalued Stocks

Undervalued stocks are those that trade below what they’re worth. Investors can turn to several metrics to gauge a stock’s worth. Some investors use standard metrics, such as price/earnings or price/cash flow. Others may look at a stock’s price relative to a company’s future growth prospects, or where a stock is trading relative to its 52-week high price.

At Morningstar, we define undervalued stocks as those that are trading below our calculated fair value estimate, adjusted for what we call uncertainty—both of which are wrapped into the Morningstar Rating for stocks. Stocks rated 4 and 5 stars are undervalued; those rated 3 stars are fairly valued; and those rated 1 or 2 stars are overvalued. For more about how we calculate our fair value estimates, think about the Morningstar Uncertainty Rating, and more, read Morningstar’s Guide to Stock Investing.

Morningstar Investor members have access to lists of 5-star stocks and 4-star stocks and can use the Morningstar Investor screener to find undervalued stocks based on their own criteria.

This article is part of Morningstar’s Q3 market review and outlook.