In a year defined by soaring inflation and rapidly rising interest rates, investor appetite for non-profitable, high-growth stocks has plunged.

Since January, The S&P/ASX All Technology index has tumbled more than 31%, with companies like Xero and Block almost halving in value.   

With 2023 set to bring further challenges, high quality companies that offer strong cash flows and company fundamentals have more resilience in the face of economic uncertainty – particularly if they’re undervalued.

According to Morningstar’s latest Market Outlook Report for the first quarter of 2023, about 44% of Australian and New Zealand stocks under coverage are either 4- or 5-star-rated, a historically high proportion. Many of these stocks have been identified as undervalued following major share price falls in 2022.

Here are 3 companies Morningstar analysts see as undervalued right now.

Westpac (WBC) 

Morningstar equity analyst Nathan Zaia says wide-moat Westpac is the cheapest of the Australian major banks, with shares hit by disappointing guidance and operating expenses, and lost market share in home loans.

But Zaia says both are expected to improve over time.

“Loan approval times, and loan growth, have already improved, but a rebasing of costs will take time,” Zaia says.

“As the second-largest lender in Australia, we remain confident the funding cost advantages Westpac enjoys will see a return to strong profits and returns on equity over time.”

Morningstar has a 4-star rating for Westpac, and a fair value estimate of $29 per share. Westpac shares last closed at $23.30.

Santos (STO) 

5-star rated Santos is trading at a 40% discount to where Morningstar sees fair value, according to senior equity analyst Mark Taylor.

Taylor says Santos' solid balance sheet and low costs are advantageous, and believes the company is not being sufficiently credited for new oil and gas developments underway.

“While the company is in extremely strong shape to weather periods of low crude prices, at the moment it enjoys very strong crude and LNG pricing,” Taylor says

“Gas has a rapidly growing role to play in fueling the world, no matter how optimistic renewable energy targets may be.”

Taylor says the federal government’s 12-month price cap on new domestic wholesale gas contracts, which passed parliament last week, will have a minimal effect on the company as its domestic gas revenue equates to less than 20% in total. Instead, Australian energy companies like Santos have a higher exposure to Asian markets.  

Morningstar equity analyst Mark Taylor raised Santos’ fair value estimate by 6% to $12 per share last Thursday following Santos’ announcement that it will be increasing shareholder returns to a minimum of 40% of free cash flow.  

Santos has a fair value estimate of $12.00 per share.  

The Star Entertainment Group (SGR) 

Star has been in the news headlines for all the wrong reasons, plagued with allegations of non-compliance with anti-money laundering and counter-terrorism financing laws.

In December, the Queensland casino regulator handed down disciplinary action for Star Entertainment following investigations, finding the firm unsuitable to hold a casino licence in the state, although stopped short of cancelling its Queensland licences. Like New South Wales, it means Star’s Queensland casinos will stay open under the supervision of a special manager.

Morningstar equity analyst Angus Hewitt says while Star will pay the special manager's costs, and penalties, it will still continue to receive net earnings from casino operations.

“While we think regulatory uncertainty around the New South Wales and Queensland licences means investors should require an additional margin of safety, at current depressed prices, we think Star is a good opportunity to capitalise on pessimism, which has become overblown,” Hewitt says.

“We continue to expect Star to eventually prove suitability and ultimately maintain its casino licences.”

Hewitt expects Star will deliver strong earnings growth over the next decade, buoyed by the recovery from current COVID-19-induced lows, the ramp-up of Queens Wharf and Gold Coast growth projects, and solid performance from its Sydney property, despite increased competition from Crown.

Star Entertainment Group is trading around a 34% discount to Morningstar’s fair value estimate of $3.90. It has an uncertainty rating of very high.