3 Low-Cost Stocks With High Potential

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar.

Today, we’re looking at three undervalued stocks that were added to the Morningstar Wide Moat Focus Index in September.

Before we get to that, here’s a little background on what it takes for a stock to be included in the index. For starters, a company must earn a wide economic moat rating from Morningstar, which means our analysts think the company possesses competitive advantages that will last for at least 20 years. In addition, the company’s stock must be among the 40 most undervalued wide-moat stocks our analysts cover to be included in the index.

The index’s constituents are a fertile hunting ground for investors who are looking for high-quality companies whose stocks are trading for less than what they’re worth. Put another way, the index is filled with low-cost stocks with high potential.

3 Low-Cost Stocks With High Potential

1. Campbell Soup CPB
2. Charles Schwab SCHW
3. Agilent Technologies A

The first stock on our list is Campbell Soup. This leading packaged food manufacturer earns a wide economic moat rating thanks to its cost advantages and brands, which include its namesake brand, Pace, Prego, and Swanson, among others. We think Campbell’s strategy is sound: By leveraging technology, data insights, and artificial intelligence, the company brings products that consumers value to the shelf in a timely fashion. Over the next decade, we’re forecasting low-single-digit annual sales growth and high-single-digit adjusted average earnings per share growth. We think Campbell’s stock is worth $61 and it looks attractive.

Next on our list of low-cost stocks with high potential is Charles Schwab. Morningstar assigns Schwab a wide economic moat rating thanks to its scale and cost efficiency. We think the bank side of the business is fine from a liquidity and capital standpoint, but it could take a couple of years before earnings are on an upward trajectory. But after interest rates have reset, we expect the firm to enjoy many years of double-digit earnings growth. We’ve assigned Schwab stock an $80 fair value estimate and we think shares look attractive.

Our final undervalued wide-moat stock today is Agilent Technologies. Agilent is a leading life sciences and diagnostics company. It creates tools to analyze the structural properties of various chemicals, molecules, and cells. While healthcare-related applications are Agilent’s largest end market, the company generates about half of its sales from nonhealthcare fields. We award the company a wide economic moat rating thanks to its intellectual property, ongoing innovation, and significant switching costs. We expect Agilent to boost margins in the next five years and grow revenue in the midsingle digits, compounded annually. We think Agilent stock is worth $151 per share and represents a growth-at-a-reasonable-price opportunity.

For more stock ideas, be sure to subscribe to Morningstar’s channel and visit Morningstar.com.

Morningstar directors Erin Lash and Michael Wong and senior analyst Julie Utterback contributed the research behind this segment.

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Watch “3 Cheap Value Stocks to Buy” for more from Susan Dziubinski.