At Morningstar, we typically suggest that the best stocks to buy are undervalued shares of companies with fundamental advantages that should allow them to effectively compete for decades. The Morningstar Economic Moat Rating encapsulates a company’s competitive advantages. Companies that earn wide economic moat ratings should be able to fight off competitors for 20 years or more; companies that earn narrow economic moat ratings should remain competitive for the next decade or longer.

Economic moats can strengthen or weaken over time as individual companies and sometimes entire industries evolve; as a result, we’ll upgrade or downgrade a company’s economic moat rating. But a moat rating change on a company isn’t a buy or sell rating for its stock. The stocks of companies that have undergone moat rating changes can still be overvalued or undervalued, depending on where their stocks are trading relative to our fair value estimates.

Morningstar recently downgraded the economic moat ratings on six companies whose stocks look undervalued today. We’d consider these stocks to buy at current prices. Do we think these are six high-quality companies? Nope. Should these six stocks be core holdings in an investment portfolio? Probably not. Are these six stocks cheap? Absolutely. In fact, we think these six surprising stocks are attractive investment opportunities specifically for risk-tolerant investors with long time horizons.

6 Surprising Stocks to Buy Now

Morningstar recently downgraded the economic moat ratings of these companies, yet their stocks look undervalued—and attractive when adjusted for uncertainty—as of April 15, 2024.

AMC Networks AMCX
Compass Minerals International CMP
Fox FOX
Nordstrom JWN
Paramount Global PARA
Warner Bros. Discovery WBD

Here’s a little bit about each stock from the analyst who covers the company, along with some key Morningstar metrics. All data is as of April 15, 2024.

AMC Networks

Morningstar Rating for Stocks: 4 stars
Morningstar Economic Moat Rating: None
Morningstar Uncertainty Rating: Very High
Stock Style Box: Small Value
Industry: Entertainment

AMC Networks stock looks cheap, trading 32% below our $15 fair value estimate. We recently downgraded this small company’s economic moat rating to none from narrow: We don’t think AMC nor its peers who have relied heavily on traditional pay TV can be nearly as profitable in a media industry built on streaming, explains Morningstar senior analyst Matthew Dolgin. And as our Very High Uncertainty Rating suggests, the disruption of the traditional pay-TV industry combined with the company’s relatively small size make predicting future cash flows tough. That said, we expect the decline in traditional TV to stabilize and for results at AMC Networks to improve greatly. We think the stock has been overly punished, adds Dolgin: It was among the worst-performing stocks of first-quarter 2024.

AMC Networks is deploying an “all of the above” strategy, and we think that gives the firm its best chance in a difficult environment. AMC is a small player that we expect will be challenged to independently find its place with consumers who are overwhelmed with numerous different streaming services, most of which have broader and deeper content than what AMC can provide. It also must continue to find and create attractive programming, which should be increasingly difficult in an industry that now has more and much larger competitors.

“All of the above” means that AMC is open to monetizing its content in multiple ways, some of which would be much riskier for peers. AMC continues to find its place in the traditional pay-TV bundle, but it generates proportionately less of its revenue on that bundle than many peers. Affiliate revenue from pay-TV distributors made up one third of the firm’s US revenue in 2023, and we estimate AMC received only about $1 per subscriber per month, on average. AMC sells its streaming services—most notably AMC+—to retail subscribers and bundles it at wholesale prices with other services. Streaming subscription revenue was nearly as much as affiliate revenue in 2023. AMC has also placed content on other streaming platforms, receiving licensing revenue or a share of associated revenue from the other streaming platforms, and it has created content to sell to third parties.

We think holding on to the linear affiliate revenue stream is critical for AMC, but we believe the relatively minuscule amount of revenue that AMC receives per pay-TV subscriber is an opportunity to make itself even more valuable. As affiliate agreements come up for renewal over the next few years, AMC is open to including AMC+ for pay-TV subscribers. Given the low amount the pay-TV distributors are paying AMC, we believe they would find this offer attractive. Even if AMC couldn’t extract additional fees from the distributors, much higher distribution for its streaming services would open new advertising opportunities.

Matthew Dolgin, Morningstar senior analyst

Compass Minerals International

Morningstar Rating for Stocks: 4 stars
Morningstar Economic Moat Rating: Narrow
Morningstar Uncertainty Rating: Very High
Stock Style Box: Small Growth
Industry: Other Industrials Metals & Mining

Compass Minerals was also among the worst-performing stocks of first-quarter 2024. We downgraded our economic moat rating on this small company to narrow from wide in April: While we still believe Compass’ salt business possesses a wide economic moat, we think the company’s other activities—its plant nutrition business and its failed investments in lithium and wildfire retardants—will weigh on its future returns on invested capital, explains Morningstar strategist Seth Goldstein. Still, we think Compass Minerals stock looks cheap, trading 45% below our fair value estimate of $25.

Compass Minerals has an enviable portfolio of cost-advantaged assets. Its Goderich rock salt mine in Ontario benefits from unique geology, and with access to a deep-water port, it can deliver deicing salt to customers at a lower cost than competitors. Additionally, the company controls one of only three naturally occurring brine sources that produces the specialty fertilizer sulfate of potash, or SOP. These operations at the Great Salt Lake in Utah can produce SOP at a lower cost than marginal-cost producers that convert standard potash.

The majority of Compass’ salt sales are to highway deicing customers. Sales volumes are determined during the winter months and strongly linked to the number of snow days per season. As such, weather has a big impact on Compass’ year-to-year results. The deicing salt business also exposes Compass to climate change risk. One effect of climate change is increased snowfall volatility from year to year, which affects Compass’ annual results. However, winter weather has shown mean reversion tendencies over longer periods.

Pricing for deicing salt is linked to winter weather as well. However, prices have historically been relatively stable compared with other commodities. Deicing salt has a low value/weight ratio, creating regional markets, and transportation costs make up a significant portion of total costs to the customer. With mines close to waterways like the Great Lakes and the Mississippi River, Compass has a transportation cost advantage over its competitors.

Compass also produces SOP, which is used for high-value crops that are sensitive to the chloride in standard potash (muriate of potash). While marginal producers use MOP and sulfuric acid to produce SOP, Compass makes most of its SOP directly from salt brine at a lower cost.

Seth Goldstein, Morningstar strategist

Fox

Morningstar Rating for Stocks: 4 stars
Morningstar Economic Moat Rating: None
Morningstar Uncertainty Rating: High
Stock Style Box: Mid Value
Industry: Entertainment

We think Fox has better near-term prospects than its stock price suggests, says Morningstar’s Dolgin, thanks to its major sports rights (including the National Football League for most of the next decade) and the top cable news network. Like AMC Networks, though, Fox is facing a new media industry in which it’s less likely to be nearly as profitable—and, as a result, we’ve downgraded our economic moat rating on the mid-cap company to none from narrow. Fox stock is a bargain: Shares are trading 35% below our $43 fair value estimate.

Fox’s strategy differs from its biggest traditional media peers, and its business has been far more resilient as a result. Although it has outperformed in the past few years, we think its dependence on the traditional pay-TV bundle for nearly all its revenue is problematic over the long term.

The two major areas where Fox differs from peers are: 1) its departure from entertainment production and, to a large extent, entertainment programming to focus on live news and sports; and 2) its decision not to operate a large-scale subscription-based streaming service.

Consumers are much more likely to watch sporting events and news programs in real time, and Fox has been able to grow advertising revenue while peers have floundered as linear viewership declines and television advertising dollars have waned. Also, the premier sports content to which Fox holds rights and Fox News’ popularity with cable viewers has given Fox bargaining power with pay-TV distributors. Despite ongoing cord-cutting, Fox’s revenue from pay-TV subscribers has continued to grow, as Fox has negotiated higher affiliate fees. Fox receives more than $8 per domestic pay-TV subscriber per month from pay-TV providers and affiliated local networks.

Problems for Fox will arise if pay-TV subscribers perpetually decline and the pay-TV bundle eventually crumbles. We assume Fox will license all its programming to streamers, but we doubt this avenue will make up for its current affiliate revenue. As long as its streaming partners have fewer subscribers than the current number of pay-TV subscribers, Fox would have to extract higher fees per subscriber than it does now from pay-TV customers, a tall order for streaming services that have other significant content costs to contend with. We expect a similar challenge with the streaming sports joint venture that Fox is creating with Warner Bros. Discovery and Disney, and a preemptive move toward streaming licensing risks accelerating the demise of the traditional bundle. Ultimately, we believe the pay-TV bundle is best for consumers and companies like Fox, but unless that bundle can be repurposed for the streaming age, we expect Fox will face long-term challenges.

Matthew Dolgin, Morningstar senior analyst

Nordstrom

Morningstar Rating for Stocks: 5 stars
Morningstar Economic Moat Rating: None
Morningstar Uncertainty Rating: Very High
Stock Style Box: Small Value
Industry: Department Stores

We recently downgraded the economic moat rating on this small company to none from narrow. Although Nordstrom operates the largest US high-end department store by sales and lays claim to one of the larger off-price concepts in the market (Nordstrom Rack), market forces have worked against the company’s results, and we don’t expect that trend to reverse course, explains Morningstar senior analyst David Swartz. We think significant spending will be required to generate even modest sales growth, he adds. Although uncertainty around the future of the business is very high, Nordstrom stock looks like a bargain as it trades 54% below our $38.50 fair value estimate.

Nordstrom has a loyal customer base built on differentiated fashion products, quality brands, and first-rate service. While we used to think that these strengths provided a competitive advantage based on a brand intangible asset, we no longer believe that it does. Realistically, Nordstrom’s recovery from the pandemic has been rocky, and the US apparel retail market has only become more competitive.

Nordstrom has 93 full-price stores, nearly all of them in desirable Class A malls (sales per square foot above $500) or major urban centers. While this store base may provide an advantage over department stores in lower-tier malls, the productivity of Nordstrom’s full-price stores has been declining all the same. The firm has invested heavily in e-commerce (36% of 2023 sales) to adapt, but digital sales seem to have come at the expense of store sales.

Nordstrom also has a presence in discount retail with Rack (about 260 stores) that could make up for some of the full-price weakness. Indeed, 19 Rack stores opened in 2023, and another 22 or so openings are expected in 2024. Rack, however, has underperformed peer discount stores of late, suggesting that it does not provide a competitive edge to Nordstrom.

Nordstrom unveiled a new strategic plan, Closer to You, in early 2021 that emphasizes e-commerce, growth in key cities (through local and other initiatives), and a broader off-price offering. Among the merchandising changes, Nordstrom intends to increase its private-label sales (to 20% of sales from about 10% now) and greatly expand the number of items offered through partnerships (to 30% from about 5% now). The firm set medium-term targets of annual revenue of $16 billion-$18 billion, operating margins above 6%, annual operating cash flow of more than $1 billion, and returns on invested capital in the low teens. Nordstrom’s recent struggles to manage through industry turmoil and exit from Canada have put these goals in doubt, but we forecast it will return to low teens adjusted ROICs (including goodwill) by 2026. However, we anticipate operating margins will top out at just over 6% in the long run due to intense competition.

David Swartz, Morningstar senior analyst

Paramount Global

Morningstar Rating for Stocks: 4 stars
Morningstar Economic Moat Rating: None
Morningstar Uncertainty Rating: Very High
Stock Style Box: Small Value
Industry: Entertainment

Paramount Global is a cheap stock to buy, trading 45% below our fair value estimate of $20. We downgraded this small company’s economic moat rating to none from narrow; it’s another name facing very high uncertainty as streaming services take hold in the entertainment industry. We believe the firm’s Paramount+ service is benefiting from the addition of live programming, integration with Showtime, and an openness to bundling, including with Walmart+, says Morningstar’s Dolgin.

Like peers, Paramount has been in a period of transition and facing significant uncertainty about how and whether the traditional linear television business will coexist or evolve in a media environment dominated by streaming services. Based on its current state, we think the company has the right strategy for streaming and advantages related to distribution and content ownership that will enable it to successfully manage the industry’s evolution.

Management has seemingly realized that there are too many streaming services with good content for consumers to be regular subscribers to all. It has therefore blurred the line between linear and streaming and moved to focus on one platform for all its best content, consolidating Showtime and Paramount+ and including local CBS programming to potentially improve customer stickiness. Sporting events on local CBS stations, including football and March Madness tournament games, are included with Paramount+. The firm discontinued the Showtime linear network, so the previous linear Showtime subscribers now have access to Paramount+. The firm is also open to partnerships and bundles, whether paired with other subscription services like Walmart+ or with pay-TV distributors. We think this will result in the widest possible exposure—and therefore monetization—of Paramount’s attractive content.

Throughout the company’s financial struggles amid the industry transition over the past few years, there has been no diminution in quality or popularity of the firm’s content. CBS continues to garner the largest audiences of all television networks and holds NFL and March Madness rights into the 2030s. Paramount Pictures and CBS Studios remain among the most prolific creators of film and television programming. We expect content creation will continue to drive licensing revenue, and the content that Paramount keeps for its own distribution outlets will remain valuable for consumers as the firm becomes agnostic to whether they’re receiving access through traditional television or streaming services. Still, we expect a more subdued business that won’t be able to increase profits nearly as much as in the past.

Matthew Dolgin, Morningstar senior analyst

Warner Bros. Discovery

Morningstar Rating for Stocks: 5 stars
Morningstar Economic Moat Rating: None
Morningstar Uncertainty Rating: Very High
Stock Style Box: Mid Value
Industry: Entertainment

The final name on our list of surprising stocks to buy, Warner Bros. Discovery is trading a remarkable 58% below our $20 fair value estimate. In fact, the stock is among our analysts’ favorite 33 undervalued stocks for second-quarter 2024. As with other media names, we downgraded Warner’s economic moat rating to none from narrow, given the uncertainty surrounding the industry shift to streaming and new competition. Morningstar’s Dolgin expects Warner to survive, in part because of its topnotch production studios that create popular films and episodic television content.

Warner Bros. Discovery faces significant uncertainty surrounding its evolution in a media landscape defined by cord-cutting and many streaming choices. Ultimately, we think Warner’s scale, distribution channels, production studios, and content portfolio will make it one of the survivors.

Like several peers whose businesses were built for traditional linear television, Warner has faced financial pressure as it tries to figure out how to compete in a world where consumers have preferred streaming to traditional television. Warner’s networks business has declined amid a continually shrinking pay-TV subscriber base, while at the same time the firm faced heightened costs to build a streaming platform, attract subscribers, and populate its platforms with a robust content library. We expect these previously bifurcated segments to start working in harmony.

Warner’s streaming business is now profitable and more mature, and we think the firm has the right strategy to navigate a convergence between traditional and new media. Its streaming assets are now confined exclusively to Max and Discovery+. Max is the home for nearly all Warner Bros. on-demand entertainment content, but it has also become an outlet for live news and sports. CNN Max, which features live programming and includes some high-profile linear CNN simulcasts, is now included in all Max subscriptions. The sports add-on package includes NBA, MLB, NHL, and NCAA March Madness games to which TNT and TBS have rights.

Whether through streaming, linear, or licensing, we expect first-rate Warner content to continue to reach consumers. The firm’s production studios remain top-tier in terms of highest-grossing films each year and popular episodic television content. Warner may have to fine-tune the traditional balance and timing for things like film exclusivity in theaters versus availability at home, or which television shows and films to license versus keeping in-house. But having a menu of distribution options and attractive content behind it should be deciding factors behind the firm’s future success. Still, we expect a more subdued business that won’t be able to grow profits nearly as much as in the past.

Matthew Dolgin, Morningstar senior analyst

What Is an Economic Moat?

Morningstar thinks that companies with economic moats have significant advantages that allow them to successfully fend off competitors for a decade or longer. Companies can carve out their economic moats in a variety of different ways—by having high switching costs, through strong brand identities, or by possessing economies of scale, to name just a few.