10 Stocks That Could Rise in Market Decline

BOSTON (TheStreet) -- Evidence is building that the overheated stock market is ready to take a breather, so investors may want to hunker down with high-quality, but undervalued, stocks. They may be hurt less in the event of a market tumble and have more upside in a subsequent rebound.

S&P Capital IQ's chief equity strategist, Sam Stovall, said Monday that among the indictors that a correction is nigh is that the S&P 500's roughly 29% gain of the past six months exceeds the 24% average in the severe corrections or mild bear markets since 1945, and it is approaching the 32%, 12-month average increase seen in such recoveries.

S&P strategist Mark Arbeter predicts that the S&P 500 "could surrender 3% to 5% in a mild pullback," which would mean a decline to its 50-day moving average of around 1,370, or even to its 65-day average near 1,350, "before resuming its upward trajectory." The S&P is at 1,385 now.

With that in mind, I screened the Morningstar database of its highest-rated stocks (five-star ratings) to find which among them are trading at the biggest discount to Morningstar's "fair value" estimate.

The premise of this approach is that these high-quality stocks are less volatile and have lots of potential upside when a rising tide lifts all the boats.

Morningstar analysts assign fair-value targets based on discounted cash-flow models. Their model assumes that the stock's value is equal to the total of the free cash flows the company is expected to generate in the future, discounted back to the present. It is not the same metric used by Wall Street firm's sell-side analysts to determine a 12-month price target, as they typically use their earnings estimates and apply a predetermined ratio to come up with a price-to-earnings price, coupled with other market factors.

"Fair values are meant to provide an estimate of what the stock is worth, irrespective of what investors are willing to pay for it," says Morningstar, and therefore they tend to be lower since the approach is more conservative.

The stocks I highlight below have price-to-fair-value ratios below 50%, which means Morningstar's analysts expect that these stocks are now trading at less than half their value, per the fair value metric.

Here are 10 of Morningstar's five-star stocks with the biggest discount to the firm's fair-value estimate listed in order of highest to lowest discount:

10. Baker Hughes ( BHI)

Company profile: Baker Hughes, with a market value of $18 billion, is a provider of a wide variety of oil-field services, such as directional drilling, oil field chemicals, drill bits, and electronic submersible pumping systems.

Dividend Yield: 1.4%

Investor takeaway: Its shares are down 15% this year, but have a three-year, average annual return of 11%. Analysts give its shares 13 "buy" ratings, nine "buy/holds," 11 "holds," and one "weak hold," according to a survey of analysts by S&P. Morningstar says its shares, now trading at $40.59, are trading at 46% of their fair-value estimate of $86.

9. AMN Healthcare Services ( AHS)

Company profile: AMN Healthcare, with a market value of $248 million, is the largest health-care staffing firm in the U.S. About two-thirds of its business is generated from its temporary nursing division, but it also provides medical professionals of all ranks.

Investor takeaway: Its shares are up 41% this year, including 22% in the past month, and have a three-year, average annual return of 1%. Analysts give its shares three "buy" ratings and four "holds," according to a survey of analysts by S&P. Morningstar analyst Vishnu Lekraj says the company is in place to benefit long-term, from strong secular industry tailwinds. Morningstar says the shares, recently at $5.90, are trading at 45% of their fair-value estimate of $13.

8. Halliburton ( HAL)

Company profile: Halliburton, with a market value of $30 billion, provides a variety of oil-field services, from pressure pumping to drilling, across North America and about 80 countries.

Dividend Yield: 1.1%

Investor takeaway: Its shares are down 4.8% this year, but have a three-year, average annual return of 25%. Morningstar says its shares, now trading at $32.37, are trading at 45% of their fair-value estimate of $72. Analysts tracked by S&P give its shares 16 "buy" ratings, 13 "buy/holds," and four "holds," according to a survey of analysts by S&P.

7. GenOn Energy ( GEN)

Company profile: GenOn Energy, with a market value of $1.5 billion, is an independent power producer operating in the Mid-Atlantic and Northeast regions and also in California. The company was formed by the result of the December, 2010 merger of RRI Energy and Mirant.

Investor takeaway: Its shares are down 22% this year and have a three-year, average annual loss of 19%. Morningstar says that its shares, now trading at $2, are trading at 44% of fair value of $4.50. Analysts give its shares five "buy" ratings, one "buy/holds," three "holds," and three "sells," according to a survey of analysts by S&P. S&P, which has it rated "buy" says the merger will result in geographic diversity and reduces its reliance on coal-fired assets.

6. Exelixis ( EXEL)

Company profile: Exelixis, with a market value of $754 million, is development-stage biotechnology company with a focus on therapeutics for the treatment of cancer and other serious diseases.

Investor takeaway: Its shares are up 7.3% this year and have a three-year, average annual return of 1.5%. Morningstar says its shares, now at $4.94, are trading at 44% of its fair-value estimate of $11. Analysts give its shares three "buy" ratings, one "buy/hold," and six "holds," according to a survey of analysts by S&P.

5. NRG Energy ( NRG)

Company profile: NRG, with a market value of $3.5 billion, is a wholesale power generation company that operates power generation facilities and sells energy.

Investor takeaway: Its shares are down 16% this year and have a three-year, average annual decline of 8%. Morningstar says its shares, now at $14.84, are trading at 43% of their fair-value estimate of $35. Analysts give its shares seven "buy" ratings, three "buy/holds," and five "holds," according to a survey of analysts by S&P.

4. Ultra Petroleum Corp. ( UPL)

Company profile: Ultra, with a market value of $3 billion, is an independent oil and natural gas exploration and production company with operations from Wyoming and to Pennsylvania.

Investor takeaway: Its shares are down 30% this year and have a three-year, average annual loss of 20%. Morningstar says its shares, now trading at $20.17, are at 40% of their fair-value estimate of $50. Analysts give its shares five "buy" ratings, one "buy/holds," and 19 "holds," according to a survey of analysts by S&P.

3. Patterson-UTI Energy ( PTEN)

Company profile: Patterson-UTI, with a market value of $2.6 billion, is North America's second largest operator of land-based drilling rigs.

Investor takeaway: Its shares are down 15% this year and have a three-year, average annual return of 17%. Morningstar says its shares, now trade at 39% of fair value of $43. Analysts give its shares nine "buy" ratings, eight "buy/holds," nine "holds," one "weak hold," and one "sell," according to a survey of analysts by S&P.

2. ArcelorMittal ( MT)

Company profile: ArcelorMittal, with a market value of $28 billion, is the world's largest steel producer, with an established presence in all major steel markets and steelmaking operations in 20 countries

Investor takeaway: Its shares are down 1.8% this year and have a three-year, average annual decline of 7%. Morningstar says its shares, now at $17.60, are trading at 36% of its fair value estimate of $48. Analysts give its shares three "buy" ratings, three "buy/holds," and two "holds," according to a survey of analysts by S&P.

1. Savient Pharmaceuticals ( SVNT)

Company profile: Savient, with a market value of $138 million, is a specialty biopharmaceutical company with one meaningful drug, Krystexxa, which treats chronic gout refractory to conventional therapy.

Investor takeaway: Its shares are down 9% this year and have a three-year, average annual loss of 26%. Morningstar says its shares, now at $1.92, are trading at 35% of their fair-value estimate of $5.50. Analysts give its shares one "buy" rating, six "holds," two "weak holds," and one "sell," according to a survey of analysts by S&P.

>>To see these stocks in action, visit the 10 Stocks That Could Rise in Market Decline portfolio on Stockpickr.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

More from Investing

PayPal Surges After Q3 Earnings Beat as Venmo Nears 'Tipping Point'

PayPal Surges After Q3 Earnings Beat as Venmo Nears 'Tipping Point'

Microsoft Slips on Thursday Despite Bullish Calls From Analysts

Microsoft Slips on Thursday Despite Bullish Calls From Analysts

The Correction Continues

The Correction Continues

Cloud Gaming Adds Growth Opportunity for Microsoft

Cloud Gaming Adds Growth Opportunity for Microsoft

Textron Tumbles on Earnings and Revenue Miss, Downbeat Forecast

Textron Tumbles on Earnings and Revenue Miss, Downbeat Forecast