Finding ASX opportunities in lofty market conditions

Aussie investors continue to fight an uphill battle against inflation, rate hikes and geopolitically instability.

Another key challenge has been identifying “cheap”, quality shares in an expensive market. When weighting ASX shares by size, the share market sits at a 10% premium to Morningstar’s Fair Value estimates. In other words, an investor buying the ASX benchmark is paying about $1.10 for every dollar of fair value.

The equal-weighted market valuation is starkly different. Driving this divergence has been investors bidding up the largest, most liquid ASX names in a flight to safety. This has been compounded by increased passive flows through ETF’s, superannuation and an increased draw to franking credits.

Where do opportunities exist?

According to our equity research team the equal-weighted and index-weighted valuations have rarely diverged this much over the past decade. This divergence suggests that there are persistent pockets of value at the lower end of the market.

Real estate and energy continue to screen as the most attractively priced sectors, with roughly 75% of shares either 4 or 5 star rated. Healthcare and consumer shares also screen as undervalued. Over the past year, basic materials (ie. mining) has swung from attractive to one of the most expensive sectors on the back of strong commodity prices.

Interestingly, close to 30% of undervalued shares now carry a narrow or wide moat rating. A balanced approach is critical when analysing valuation metrics. While value opportunities exist, ensuring a company can sustain competitive advantages through the cycle is another important piece of the puzzle. I have selected three of the top picks highlighted in the “Australian Equity Market Outlook: Q3 2026” that are both undervalued and carry moat ratings.

Endeavour (ASX:EDV)

• Fair Value Estimate: $5.40 (35% discount at 29 July)
• Rating: ★★★★★
• Moat: Wide

Endeavour operates the largest network of liquor stores throughout the country, with more than 1,700 liquor outlets across the well-known Dan Murphy’s and BWS brands. Endeavour also has substantial interests in hotels and electronic gaming machines, operating more than 12,000 gaming machines across its portfolio of over 300 hotels, pubs and clubs.

Shifting consumer trends toward online shopping and convenience have led to strategic investments in online shopping platforms and delivery capabilities. Endeavour’s revenue is highly skewed to the retail liquor segment, which is forecasted to contribute about 80% of revenue over the next decade, with the balance coming from the hotels segment.

Its wide economic moat rating is underpinned by scale cost advantages in Australian liquor retailing. Furthermore, its hotels segment benefits from intangible assets related to gaming licenses, providing a second, reasonably defensive earnings stream. Liquor demand is defensive in nature underpinned by inflation, population growth and a structural trend toward premiumisation.

Endeavour is trading significantly below our fair value estimate of $5.40 per share despite the high visibility of earnings for its moated liquor business. The current dividend yield is 4.92% fully franked.

Sonic Health (ASX.SHL)

• Fair Value Estimate: $27 (20% discount at 29 July)
• Rating: ★★★★
• Moat: Narrow

Sonic Healthcare provides medical testing and imaging services (such as blood tests) to assist doctors diagnose and manage patient health. It is the third-largest private provider of laboratory medicine globally, behind Quest Diagnostics and Labcorp.

The company’s strategy focuses on being a low-cost provider and gaining cost advantage over competitors through scale. This has largely been pursued through acquisitions, buying smaller operators to expand its market share in geographies where it operates.

Sonic Healthcare has a narrow economic moat, stemming from cost advantages which are driven by significant scale in pathology, particularly in Australia and Europe. This has allowed Sonic to provide pathology tests at a lower cost than its competitors.

We forecast profitability improving, driven by rationalization of its US anatomical pathology operations, increasing testing volumes in the UK from its new Watford laboratory and cost savings from the integration of the acquisition of LADR in Germany.

Sonic faces some regulatory hurdles such as the proposed reform of the private fee schedule in Germany, where Sonic generates 25% of group revenue. However, adverse regulatory developments typically hurt smaller competitors more. This can also drive consolidation benefits for Sonic, who is a market leader in pathology.

Sonic Healthcare currently trades at a discount to our $27 fair value ahead of earnings season. It has a current dividend yield of 5% which is 60% franked.

Spark New Zealand (ASX:SPK)

• Fair Value Estimate: $2.90 (43% discount at 29 July)
• Rating: ★★★★★
• Moat: Narrow

Spark New Zealand generates steady cash flow, has a solid position in the New Zealand telecommunications market and has the infrastructure to offer a diverse range of products. Although competition is intense in the New Zealand market, we believe Spark’s scale provides a competitive advantage. Furthermore, private equity ownership of Vodafone New Zealand has heralded in a new age of rational competitive behaviour in mobile.

However, Spark is currently navigating a tough economic environment in New Zealand, and management is scrambling to cut costs to adjust to the weak revenue environment. Noncore operations such as data centers, IT, and cloud are also taking up management resources.

Construction of an ultrafast broadband network has also lowered barriers to entry in fixed-line and broadband and represents a risk to Spark’s broadband business. Successful execution of product bundling that leverages the mobile network could help defend broadband market share, as will continuing growth in fixed wireless broadband.

Spark’s narrow moat is supported by cost advantage and economies of scale in a relatively small market. Spark is the equal-largest player in mobile with over 40% service revenue market share. The dominant market positions of Spark and Vodafone may make it difficult for new players to enter the market and establish necessary scale.

Spark trades at a sizeable discount to our $2.90 price target. The weak share price performance has pushed the current dividend yield close to 10% (no franking applied).

The full Q3 Australian Equity report is available to Morningstar Investor subscribers and trialists.

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