Everyone is looking for returns. Investors are looking for the best return on their investments and companies are looking for the best return on their invested capital. Susan Dziubinski led the way Morning star Looking for companies that are doing well.
These are companies that have outperformed the 10-year Morningstar US Market Index, with an average three-year return on invested capital (ROIC) of more than 20%. Companies must also be cheap and priced at least 20% below their estimated fair value.
Dziubinski has found 5 and they can continue to perform well thanks to their superiority over competitors (economic moat) and attractive valuations.
What does ROI (return on investment) mean?
Return on capital employed, or ROIC, measures a company’s profitability compared to the capital invested. This way, companies can be compared with each other. A company with a higher ROI uses its capital more efficiently than a company with a lower ROI.
Morningstar prefers a three-year average because the return on invested capital in one year can be affected by a variety of factors. The five undervalued companies below have delivered great returns in several ways.
Teradyne is a company that produces testing equipment for semiconductors. It ranks as the most undervalued stock on this list. It is trading 38% below its estimated fair value. The chip market is currently suffering from modest demand for smartphones and a decline in the memory chip market.
Analyst William Kerwin says Teradyne could benefit from a cyclical upturn and that the shares are undervalued. As a market leader, Teradyne has strong margins and a solid return on invested capital. It has a strong moat, a strong balance sheet, and a healthy net cash position. According to a Morningstar analyst, there is growth potential in the fast-growing robotics market.
Taiwan Semiconductor Manufacturing Co., Ltd
Taiwan Semiconductor Company deserves the top spot when looking at the best returns over 10 years. Management has achieved a strong return on investment over the past 10 years Return on equity For generation, both average more than 20%. Analyst Felix Lee points out that the company’s profits are much more stable than those of its competitors. In addition, the stock is very cheap and trades 30% below its estimated fair value.
TSMC is the world’s largest chip manufacturer. The company’s strategy is successful. Lee believes there are two factors that could drive long-term growth. First, consolidation of semiconductor companies will increase demand for advanced chips. Second, the organic growth of artificial intelligence, the Internet of Things, and powerful computing applications could continue for decades.
The list has more chip companies. Skyworks Solutions is a leading supplier for smartphone manufacturers. The company has a narrow economic moat and does well with its return on investment (ROIC). Analyst Brian Colello says demand is currently weak but resilient.
The stock price was 29% below the estimated fair value. Skyworks Solutions could benefit from the advent of 5G technology, which is more complex than 4G. There is fierce competition in the field of RF chips. A limited customer base can put pressure on prices. Apple alone accounts for approximately 59% of fiscal 2022 revenue. So Skyworks’ diversification into other end markets is an important development.
MarketAxess operates a leading platform for electronic corporate bond trading. The focus is on US securities. 30%-40% of trading is in emerging market debt and Eurobonds. It is also possible to trade US Treasuries on the platform, but corporate bonds form the core of the activities.
MarketAxess is trading at 24% below its estimated fair value. Management is investing wisely and has a full cash pool for further investments or acquisitions, notes analyst Michael Miller. High interest rates put pressure on prices, weakening results this year. 2023 is expected to be an even better year for MarketAxess’ growth.
The company benefits from higher trading volume due to higher volatility in fixed income markets. Competition from other trading platforms is fierce. Miller still sees major growth drivers for MarketAxess, but competition will be a headwind to volume growth.
Edwards Life Sciences
After chips and digital services, we come to a company in the medical sector. Edwards Lifesciences is active in the surgical heart valves market. According to analyst Debbie Wang, the company is a market leader in this regard. The company regularly trades above its estimated fair value, but is currently trading at a 22% discount. To maintain its leadership position, the company spends large sums of money on research and development.
Although Edwards Lifesciences is much smaller in terms of revenue than its closest competitors Medtronic and Abbott, it is a global market leader in heart valves. Wang also sees some potential bumps in the growth trajectory, but he still believes that the long-term clinical trend will shift toward catheter technologies, and that Edwards is well positioned to capitalize on that.
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