Investment research house Morningstar has released its "highest conviction" stock ideas. According to the Australian Financial Review, the full list, which is published in the BRW Magazine, includes two resource sector plays and two insurance sector plays.
Alumina (ASX: AWC) offers investors exposure to bauxite mining, alumina refining and aluminium smelting operations. Alumina's shares have increased by 9% in the past 12 months, meaning they have underperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) by around 6%. Morningstar believes Alumina's shares are worth $2.60 compared with their current trading price of 99.5 cents per share, which suggests upside of 160% to fair value.
Woodside Petroleum (ASX: WPL) is one of Australia's largest oil and gas companies and boasts a market capitalisation of $31 billion. The shares have nearly kept pace with the S&P/ASX 200 Index in the last year with the index up 15.8% and Woodside's shares up 14.4%. With the shares currently trading at $37.90, Morningstar sees further upside; placing a fair value of $46 on the stock.
AMP (ASX: AMP) is one of Australia's best known and highest regarded insurers and wealth managers. The share price has significantly underperformed the market in the past year, largely due to a surprise earnings downgrade at the half year. Morningstar obviously thinks the longer term outlook is rosy, stating that "AMP is our preferred wealth manager due to high market share, a strong brand, large sticky customer base, low-cost base and the largest aligned financial planner network in Australia and New Zealand." With a fair value estimate of $6, there is reasonable upside for investors from AMP's current share spice of $4.60.
QBE Insurance (ASX: QBE) has had a tumultuous few years and shareholder returns have suffered with dividends reduced and the share price underperforming. Hopefully the worst is now behind the global insurer with Morningstar "increasingly confident earnings will recover." With the shares currently selling at $14.55 there is around 18% upside to Morningstar's fair value of $18.
Foolish takeaway
For investors it's important to note that often it is stocks that, for one reason or another, have been last year's underperformers that are poised to be next year's outperformers. Recent underperformance can lead to a gap emerging between price and value and that's where the opportunity to find a profitable investment lies.
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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.
