Morningstar: These 10 top stocks have strong cash flow, smart management teams, and are trading way below fair market value — making them the perfect investments to add to your portfolio as the chance

• Stocks have rallied so far in 2023, but heightened volatility and uncertainty lie ahead.
• In times like these, high-quality stocks with strong fundamentals are always a good bet.
• Here are Morningstar’s top 10 stock picks that are trading as much as 35% below fair market value.

2023 has barely begun, but the stock market is already off to the races.

After plunging into a bear market last summer, equities found it difficult to climb out of negative territory. But the ongoing market rally has revealed investors’ newfound optimism around peaking inflation, China’s reopening, and hopes for a dovish Federal Reserve pivot sometime this year.

Still, the question remains: is this finally the bull market rally investors have been waiting for, or is it doomed to eventually collapse?

Mark Haefele, the chief investment officer at UBS Global Wealth Management, believes that today’s optimism is overblown. “It remains possible that the rally is a ‘head fake,’ and that economic data will ultimately disappoint,” said Haefele in a note from January 18. In that note he pointed to a looming recession, the possibility of sticky inflation on the way down, and the pain from higher interest rates hitting consumers harder than expected.

His sentiment was echoed by Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, who told Insider in a recent interview that market fundamentals remain bleak.

“We’re just now entering a profits recession both in the US and globally, and liquidity is set to tighten even further in 2023,” he explained. “That’s the worst possible combination of macro factors for markets, so we’re still pretty cautious in the outlook.”

Top 10 undervalued stocks to buy

No matter what happens next, right now the market is ripe with heightened volatility — and it’s expected to remain volatile in the months to come. Given the increased uncertainty ahead, investors have been focusing on defense lately, buying dividend-paying or high-quality stocks with strong fundamentals.

“Value, high quality, and equally-weighted equity portfolios are likely to lead the next bull market after a decade of growth and market-cap index outperformance,” wrote Jared Woodard, head of Bank of America’s research investment committee, in a January 10 report. “Understanding and owning the right kinds of quality will be key for navigating interim volatility.”

In practice, this means investing in companies with robust balance sheets, a healthy cash flow, a competitive advantage over their peers, and management teams with a good track record.

In a note from February 1, Morningstar analysts compiled a list of their top 10 best undervalued stock picks. Each of these companies have a competitive advantage that will either remain stable or is expected to grow, and are trading anywhere between 27% to 35% below Morningstar’s fair value estimate. The full list of 10 stocks is below, along with each firm’s ticker, industry, market capitalization, and current price-to-fair value ratio.