5 Ultracheap Stocks to Buy With the Best Returns on Investment

Almost universally, investors want the best returns they can get. Individual investors seek the best returns on their individual stock investments; companies, meanwhile, seek the best returns on their invested capital, or ROIC.

We went searching for companies that have done well according to both definitions of “return on investment.” Specifically, we screened for:

• Stocks that returned more than the Morningstar US Market Index on an annualized basis during the trailing 10-year period.
• Companies with average three-year fiscal ROICs exceeding 20%.
• Companies with wide or narrow Morningstar Economic Moat Ratings.
• Stocks that are trading at least 20% below Morningstar’s fair value estimates.

The five stocks here tick all those boxes. While we can’t predict whether these companies and their stocks will continue to generate top returns on investment, we do expect them to be competitive during the coming decade given their economic moat ratings and valuations today.

5 Ultracheap Stocks to Buy With the Best Returns on Investment

These quality stocks of companies with solid ROICs have beaten the market during the past decade—and they’re significantly undervalued, too.

1. Trinet Group TNET
2. Autodesk ADSK
3. Paycom Software PAYC
4. Adobe ADBE
5. MarketAxess MKTX

Here are some key metrics about each stock, along with insights from our analysts. Data is as of June 11, 2024.

Trinet Group

• Price/Fair Value: 0.72
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Standard
• Trailing 10-Year Annualized Return: 14.48%
• Average Fiscal Three-Year ROIC: 27.53%
• Industry: Staffing & Employment Services

The ultracheap stock with the best return on investment on our list, Trinet Group is trading 28% below our fair value estimate of $145. We think the company has established a narrow economic moat that will allow the company to remain competitive for a decade or longer, thanks to high customer switching costs stemming from the mission-critical nature of the human resources function, explains Morningstar analyst Emma Williams.

We view TriNet as well placed to take share of the expansive, fragmented small and midsize business payroll and human capital management market, through industry consolidation and rising demand for comprehensive, outsourced solutions. Regional providers or do-it-yourself solutions such as Intuit’s QuickBooks or Microsoft Excel service most of the small-business market, creating meaningful scope for greater penetration by value-added providers like TriNet.

We expect TriNet and fellow HCM providers to benefit from attractive industry tailwinds, including rising regulatory complexity, increasingly dispersed workforces, and fierce competition for talent. In the context of these industry tailwinds, the high-touch professional employer organization service model is increasingly attractive to SMBs looking to share employment risk liability via a co-employment model and leverage the PEO provider’s scale and expertise to access HR compliance support and competitive employee benefits.

Relative to industry peers, TriNet is selective about the risk profile of co-employment clients given the firm operates an at-risk insurance model, and targets six core industry verticals deemed to have attractive employment growth and benefit attachment potential. Together, this strategy yields higher-value clients with lower insurance risk profiles at the expense of worksite employee growth relative to peers. Over the coming decade, we expect low-single-digit worksite employee growth, steady insurance attachment, and like-for-like price increases to drive mid-single-digit top-line growth.

While TriNet is a PEO provider, the firm has diversified its offering via acquisition of self-service HCM software provider Zenefits and R&D tax credit solution Clarus R+D. The acquisitions expand TriNet’s addressable market and cater to clients that outgrow the PEO model, and as a pipeline for future PEO clients, minimizing client attrition and customer-acquisition costs. We view TriNet’s product expansion as strategically sound and complementary to existing offerings; however, we expect elevated investment to expand and market these acquired businesses to weigh on profitability over the medium term.

Autodesk

• Price/Fair Value: 0.77
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Exemplary
• Trailing 10-Year Annualized Return: 14.61%
• Average Fiscal Three-Year ROIC: 27.01%
• Industry: Software—Application

The first of three wide-moat companies on our list of stocks with the best returns on investment, Autodesk exhibits switching costs across all its industry exposures because of the complexity of its products, observes Morningstar analyst Julie Bhusal Sharma. We were impressed with Autodesk’s top-line growth in the most recent quarter; the transaction model transition is progressing well and should provide a positive indicator for future upside, she adds. The topper: The stock is ultracheap, trading 23% below our $275 fair value estimate.

We view Autodesk as the global industry standard computer-aided design software. Millions of industry professionals rely on Autodesk software to design and model buildings, manufactured products, animated films, and video games. We think Autodesk will remain the industry standard, as its switching costs and network effect continue to reinforce one another and Autodesk stays at the forefront of industry trends. The company now has over 95% of revenue recurring, after a gradual transition from licenses the past eight years. We think the change enables Autodesk to extract greater revenue per user as it upsells its loyal and increasingly maturing base.

Over 70% of Autodesk’s business is in the architecture, engineering, and construction industry, which is undergoing a movement to tackle the many inefficiencies in the AEC landscape. Autodesk has been at the forefront of enabling such changes, even when it comes to actively ensuring its interoperability between competition software, which speeds up project cycles.

We think Autodesk has so widely embraced what many companies would avoid because it is well aware that the brunt of its switching costs aren’t in the loss and transfer of design and model data, but rather the training of its software (which can take years to master). For Autodesk, we think widespread training on its software will continue as a result of its healthy network effect. The company has nurtured a long-standing network effect via relationships with higher-education programs that expose industry professionals to the software before they enter the workforce. This reinforces AEC firms to operate on Autodesk software.

Rather than resting on its laurels and counting on its network effect to do all the work in protecting its incumbency, Autodesk has continued to innovate. Autodesk has disrupted itself with its Revit 3D modeling software, which has served as a replacement for many AutoCAD users because of its use of parametric modeling to predict unknown variables. While Revit was acquired in 2002, its innovation since has us confident in Autodesk’s eye to the future.

Paycom Software

• Price/Fair Value: 0.55
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Exemplary
• Trailing 10-Year Annualized Return: 25.95%
• Average Fiscal Three-Year ROIC: 26.17%
• Industry: Software—Application

Yet another software company on our list of undervalued stocks to buy with the best returns on investment, Paycom Software maintains a narrow economic moat rating and earns high marks for how its management has allocated capital. “While dominant provider ADP has invested heavily over the past decade to remain competitive on functionality, nascent providers like Paycom have been able to capitalize on that company’s shortfalls and capture market share through the appeal of its nimble, unified, and user-friendly platform,” notes Morningstar’s Williams. The stock is trading 45% below our $260 fair value estimate.

Paycom’s unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management solution. The company’s platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the rollout of its Beti self-service payroll module.

We expect Paycom will continue to take share of the growing payroll and HCM industry through industry consolidation and capitalizing on the shortfalls of competitors. The company has reported impressive growth to date, reflecting an ability to win clients and demonstrating how the cost and efficiency benefits of streamlining payroll and HCM solutions to a single platform can overcome inherent client switching costs.

We anticipate Paycom's average revenue per client will increase at an average rate of 7% to 2028 due to a gradual shift upmarket and from taking greater share of wallet through upselling existing and new modules. Paycom's target market has shifted upward over several years, with the company formally lifting the upper bound to over 10,000 employees in 2023 from 2,000 in 2013. While we expect Paycom's average client size to increase, we expect its offering to be less appealing to mega enterprises that typically prefer to integrate best-of-breed solutions, in our view limiting the upmarket upside for Paycom.

Adobe

• Price/Fair Value: 0.76
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Exemplary
• Trailing 10-Year Annualized Return: 21.23%
• Average Fiscal Three-Year ROIC: 26.11%
• Industry: Software—Infrastructure

Adobe’s products are the go-to tools for creative professionals; not surprisingly, Morningstar awards the company a wide economic moat rating. We model a five-year revenue compound annual growth rate of approximately 12%. “We foresee solid growth in digital media and digital experience even as both steadily slow over time,” says Morningstar senior analyst Dan Romanoff. This undervalued stock is trading 24% below our $610 fair value estimate.

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation. The December 2021 launch of Adobe Express helps further broaden the company’s funnel, as it incorporates popular features of the full Creative Cloud but comes in lower cost and free versions. The 2023 introduction of Firefly marks an important artificial intelligence solution that should also attract new users. We think Adobe is properly focusing on bringing new users under its umbrella and believe that converting these users will become more important over time.

CEO Shantanu Narayen provided Adobe with another growth leg in 2009 with the acquisition of Omniture, a leading web analytics solution that serves as the foundation of the digital experience segment that Adobe has used as a platform to layer in a variety of other marketing and advertising solutions. Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento, Marketo, and Workfront acquisitions, we expect Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.

The Document Cloud is driven by one of Adobe’s first products, Acrobat, and the ubiquitous PDF file format created by the company; it is now a $2.8 billion business. The rise of smartphones and tablets, coupled with bring-your-own-device and a mobile workforce, has made a file format that is usable on any screen more relevant than ever.

Adobe believes it is attacking an addressable market well in excess of $200 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher-price-point solutions, and cross-sell digital media offerings.

MarketAxess

• Price/Fair Value: 0.65
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Exemplary
• Trailing 10-Year Annualized Return: 14.93%
• Average Fiscal Three-Year ROIC: 21.45%
• Industry: Capital Markets

MarketAxess rounds out our list of ultracheap stocks with the best return on investment. This undervalued stock is trading 35% below our $300 fair value estimate. We think management has invested the firm’s capital wisely and has a significant cash pile on hand to invest more capital in the business or make an acquisition, says Morningstar analyst Michael Miller. Results for the most recent quarter were in line with our expectations, as strong volume in US investment-grade and emerging-market debt was offset by a decline in the firm’s market share of US high-yield corporate bond trading, he adds.

MarketAxess operates the leading platform for the electronic trading of corporate bonds. While the company is primarily focused on US securities, 30%-40% of its corporate bond trading volume comes from emerging-markets debt and Eurobonds, giving the company a strong international presence. MarketAxess also offers trading in US Treasuries and municipal bonds, bolstering its efforts in these sectors through the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. That said, corporate bonds are the core of MarketAxess’ business, which we expect will remain true, a consequence of being a relative newcomer to the Treasury trading market and the smaller size of the municipal-debt market.

Fixed-income markets globally are increasingly moving away from voice-negotiated trading toward electronic trading platforms, as the liquidity and workflow enhancement of these electronic networks promise to lower implicit and explicit trading costs for increasingly expense-conscious firms. As MarketAxess rolls out new features such as automated trade execution and expands its Open Trading all-to-all network, the cost and liquidity advantages of electronic trading networks over traditional methods continues to increase.

We expect 2024 to be a better year for growth for MarketAxess as last year the company faced dual headwinds from both low corporate bond issuance levels and unfavorable mix shift creating downward pressure on its average fees. While these headwinds are still a factor, the company is benefiting from higher trading volume industrywide, and if interest rates fall, the company will see some relief for its average pricing. That said, MarketAxess continues to face significant competition in the electronically traded US corporate bond market from both Tradeweb and the smaller Trumid, which has led its investment-grade bond market share to be relatively stagnant in recent years. To make matters worse, while MarketAxess retains a dominant position in the US high-yield bond market, performance has been disappointing in recent months. We still see meaningful secular growth drivers for MarketAxess, but competition will be a headwind to volume growth.

What Is Return on Invested Capital?

Return on invested capital measures the profitability of a company in relation to the capital it has invested. Expressed as a percentage, ROIC allows investors to compare how efficient one company is versus another when it comes to turning capital into profits. A company with a higher ROIC is more efficiently using its capital than a company with a lower ROIC. In the case of the screening used in this article, we were focusing on companies that generated at least $0.20 of profit on every dollar of capital invested, on average, during the past three years.

Why look back at three years’ worth of ROIC rather than examine just one year?

“When analyzing a company’s historical return on invested capital, we prefer using a three-year average,” explains Morningstar US market strategist David Sekera. “ROIC can be affected by a wide range of factors in any one year. Such factors could include nonrecurring charges, changes in capital structure, and merger activity. The longer average also helps to smooth out changes in profitability for especially cyclical companies.”

What Are the Morningstar Economic Moat Rating, the Morningstar Fair Value Estimate, and the Morningstar Capital Allocation Rating?

Morningstar thinks that companies with economic moats possess significant advantages that allow them to successfully fend off competitors for a decade or more. 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. Companies that we think can maintain their competitive advantages for at least 10 years earn narrow economic moat ratings; those we think can successfully compete for 20 years or longer earn wide economic moat ratings.

The Morningstar fair value estimate represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in the fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum.

Lastly, the Morningstar Capital Allocation Rating is an assessment of how well a company manages its balance sheet investments and shareholders’ distributions. Analysts assign each company one of three ratings—Exemplary, Standard, or Poor—based on their assessments of how well a management team provides shareholder returns.