Morningstar Insights: 10 Undervalued Wide-Moat Stocks

Susan Dziubinski, investment specialist with more than 30 years of experience at Morningstar covering stocks, funds, and portfolios discusses how these cheap high-quality stocks from the Morningstar Wide Moat Focus Index are attractive for long-term investors.

The Morningstar Wide Moat Focus Index tracks companies that earn Morningstar Economic Moat Ratings of wide and whose stocks are trading at the lowest current market prices relative to our fair value estimates.

Wide-moat companies carry sound balance sheets and significant competitive advantages—two desirable qualities in the face of today’s economic uncertainty.

How has this collection of undervalued high-quality stocks performed this year? Pretty well: The Morningstar Wide Moat Focus Index outperformed the broad-based Morningstar US Market Index for the year to date by nearly 7 full percentage points as of Dec. 16, 2022. The undervalued wide-moat stocks included in the index beat the broader market for the trailing three-, five- and 10-year periods, too.

With those performance numbers on the index’s side, its constituents are a fertile hunting ground for long-term investors looking for high-quality stocks trading at cheap prices.

10 Undervalued Wide-Moat Stocks to Consider

These were the 10 most undervalued wide-moat stocks in the Morningstar Wide Moat Focus Index as of Dec. 16, 2022:

  • Meta Platforms META
  • Teradyne TER
  • Comcast CMCSA
  • Amazon.com AMZN
  • Walt Disney DIS
  • TransUnion TRU
  • Salesforce CRM
  • Alphabet GOOG
  • ServiceNow NOW
  • Equifax EFX

The most undervalued stock on the list, Meta Platforms, was trading 56% below our fair value estimate as of Dec. 16, while the last on the list, Equifax stock, was trading 38% below our fair estimate. We think all 10 of these names are excellent high-quality stock ideas for long-term investors.

In an effort to keep the index focused on the least-expensive high-quality stocks, Morningstar reconstitutes the index regularly. The index consists of two subportfolios containing 40 stocks each, many of which are overlapping positions. The subportfolios are reconstituted semiannually in alternating quarters on a “staggered” schedule.

Morningstar re-evaluates the index’s holdings and adds and removes stocks based on a preset methodology. Because stocks are equally weighted within each subportfolio, the reconstitution process also involves rightsizing positions.

After the most recent reconstitution, half of the portfolio added six stocks and eliminated six stocks.

6 Wide-Moat Stocks Added to the Index

These stocks were added to the Morningstar Wide Moat Focus Index on Dec. 16:

  • Fortinet FTNT
  • International Flavors & Fragrances IFF
  • Monolithic Power Systems MPWR
  • Dominion Energy D
  • Tradeweb Markets TW
  • U.S. Bancorp USB

The new additions to the index hail from a hodgepodge of sectors: two technology stocks (Fortinet and Monolithic Power Systems), two financial-services stocks (Tradeweb Markets and U.S. Bancorp), one basic-materials stock (International Flavors & Fragrances), and one utilities stock (Dominion Energy).

6 Wide-Moat Stocks Removed From the Index

These stocks were removed from the Morningstar Wide Moat Focus Index on Dec. 16:

  • BlackRock BLK
  • Charles Schwab SCHW
  • Gilead Sciences GILD
  • Guidewire Software GWRE
  • Honeywell HON
  • Intel INTC

Two reasons for removing stocks from the index are if we downgrade their economic moat ratings or if their price/fair value ratios rise significantly. Intel’s stock was removed from the index because we downgraded the company’s moat rating to narrow from wide. Nearly all of the other stocks removed during the latest reconstitution were pushed out by stocks that were trading at more attractive price/fair value ratios at the time of reconstitution. That being said, the stocks that were removed shouldn’t be considered stocks to sell. In fact, some of these stocks are still trading in what we’d consider a buying range. They’re just not as undervalued as the stocks added to the index at the time of the reconstitution.

What Are Wide-Moat Stocks?

Morningstar thinks that companies with wide economic moats have significant advantages that allow them to successfully fend off competitors for decades. 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.


Morningstar Disclaimers:

The opinions, information, data, and analyses presented herein do not constitute investment advice; are provided as of the date written; and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this document. Except as otherwise required by law, Morningstar, Inc or its subsidiaries shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. It is important to note that investments in securities involve risk, including as a result of market and general economic conditions, and will not always be profitable. Indexes are unmanaged and not available for direct investment.

This commentary may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Morningstar or its subsidiaries or affiliates to any registration or licensing requirements in such jurisdiction.


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This information has been accurately reproduced, as received from Morningstar, Inc. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Morningstar Insights: 3 Stocks Top Managers Are Selling

Susan Dziubinski, investment specialist with more than 30 years of experience at Morningstar covering stocks, funds, and portfolios gives an insight on Meta Platforms Inc (META), The Home Depot Inc (HD), and Comcast Corp (CMCSA) that form part of Morningstar’s Ultimate Stock-Pickers that sold last quarter.

Each quarter, we take a look at the recent transactions of some of the top money managers around—who we call our Ultimate Stock-Pickers.

Today, we’re taking a look at three stocks that several of our Ultimate Stock-Pickers sold last quarter.

3 Stocks Top Managers Are Selling

These stocks are being sold by top managers. Data as of Dec. 15, 2022.

1. Comcast CMCSA

2. Meta Platforms META

3. Home Depot HD

Nine of our 26 Ultimate Stock-Pickers scaled back in Comcast last quarter. The stock has had a tough year, losing roughly 25% in the third quarter alone. Growth has slowed at Comcast, and Morningstar thinks that the days of mid-single-digit broadband growth are behind us. However the company has great cash flow that has been returned to shareholders through buybacks and dividends, thereby increasing shareholder value. We think Comcast stock is significantly undervalued; we think shares are worth $60 each.

Eight managers trimmed Meta Platforms last quarter. Meta stock has plummeted more than 60% this year. The largest social network in the world has faced headwinds in 2022, including a strong dollar, economic uncertainty, a change in Apple’s data privacy policies, and possible fines for not complying with European privacy rules. The stock is trading well below Morningstar’s $260 fair value estimate.

And seven of our Ultimate Stock-Pickers pulled back on Home Depot last quarter. The world’s largest home improvement specialty retailer has had a good 2022, benefiting from healthy long-term housing dynamics and improvements in its merchandising and distribution network. We think Home Depot stock is worth $270 per share, and shares are trading well above that today.

Morningstar director Mike Hodel, strategist Eric Compton, senior analysts Jaime Katz and Ali Mogharabi, and associate analysts Ari Felhandler and Verushka Shetty provided the research behind this segment.


Morningstar Disclaimers:

The opinions, information, data, and analyses presented herein do not constitute investment advice; are provided as of the date written; and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this document. Except as otherwise required by law, Morningstar, Inc or its subsidiaries shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. It is important to note that investments in securities involve risk, including as a result of market and general economic conditions, and will not always be profitable. Indexes are unmanaged and not available for direct investment.

This commentary may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Morningstar or its subsidiaries or affiliates to any registration or licensing requirements in such jurisdiction.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Morningstar, Inc. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Morningstar Insights: What Investors Can Learn From a Terrible Year

Sandy Ward, markets reporter and columnist for Morningstar gives an insight on the painful lessons from the markets to take into 2023 and beyond.

Investors can’t say goodbye to 2022 fast enough.

War. Severe supply shortages. Inflation at the highest levels in 40 years. Interest rates rising at a speed and by a size that was unprecedented. A bear market in stocks. A historic selloff in bonds. The tanking of Big Tech. The collapse of cryptocurrencies. The worst market for raising capital through initial public offerings in 30 years. A still lingering pandemic. The expression “cash is king” made a comeback. That was the year that was.

In hindsight, the risks were in plain view, if only anyone wanted to look.

Eventually, long-held market truisms, such as “buy the dip” in a market swoon and the sacrosanct nature of the “60/40″ portfolio, in which bonds are balanced against stocks to shockproof portfolios, were sorely tested.

So what lessons can investors glean from 2022?

Valuations Matter

Graeme Forster, portfolio manager for international and global equity strategies at U.K.-based Orbis Investment Management, refers to the start of 2022 as the “Everything Bubble.”

Stock market valuations hovered at all-time highs, particularly among the most dominant big technology stocks—think Meta Platforms (META), Alphabet (GOOGL), the parent company of Google, and Amazon.com (AMZN) to name a few—as “money flooded into new economy assets, including Tesla (TSLA) and NFTs (nonfungible tokens), and cryptocurrencies” a dynamic that resembled the Nifty Fifty era of the late ’60s, the dot-com boom in the late ‘90s, and even Japan in the late ‘80s, he says.

“Any kind of growth stock traded at absurd levels,” says Forster. “And absurdity rhymes every time,” a play on Mark Twain’s observation that “history never repeats itself, but it often rhymes.”

Some flagrant signs of the times as he sees it: A virtual yacht sold in the metaverse of an online game for $650,000, virtual real estate transactions in the metaverse totaled more than $500 million, and a digital Gucci handbag sold for $4,000, more than a real one, in the metaverse.

He compares the overinvestment in intangible assets to the underinvestment in real assets by old-economy companies, such as energy and commodity producers, which he sees as emboldening Russia’s invasion of Ukraine, that resulted in supply shocks and an inflationary spiral.

Bonds, too, represented huge risks, with yields at historically low levels. Yet, investors behaved as if the long bull cycle in both stocks and bonds would go on forever, lulled by the events of the prior year in which the government turned on the fiscal spigots and loosened monetary policy to protect the economy during the pandemic. Easy money conditions inevitably lead to excess risk-taking and the misallocation of capital, says Forster.

“Valuation was key this year,” says David Sekera, chief U.S. market strategist at Morningstar, who warned investors early on that the broad stock market was overvalued. “Investors need to know what they are paying for.”

Indeed, value stocks—those whose prices typically don’t reflect their true worth based on their fundamentals and underlying assets—have delivered returns this year that have far outpaced their growth counterparts. The Morningstar US Market Broad Value Extended Index is off nearly 8% this year compared with the Morningstar US Market Broad Growth Index, which has fallen more than 30%.

Interest Rates Matter

Never in our lifetimes has there been a collapse of bonds such as was witnessed this year. The yield on the 10-year Treasury, at a recent 3.59%, has more than doubled since the start of the year, clobbering prices. Prices move inversely to yields.

Blame the debacle on the swift and aggressive rate hikes by the Federal Reserve Board to tackle inflation after an extremely long stretch of ultralow interest rates. The federal-funds rate started the year near zero and is now at 4.25%-4.50%

Investors overlooked how risky the bond market had become and how even small interest-rate hikes would amplify losses.

“The size of the move was huge and the speed has been unprecedented,” says Eddy Vataru, lead portfolio manager for total return strategy at Osterweis Capital Management. “Usually, the Fed hikes slowly and cuts quickly.”

He added, “It was a trifecta: Bonds produced no income, there were price risks, and a hyperactive Fed.”

Long considered a source of safety and stability, providing ballast to more volatile stocks, bonds’ double-digit losses compounded investor woes in 2022. The Morningstar US Bond Index is down 11.19% this year while the Morningstar US Market Index is down more than 19%.

Deutsche Bank strategists, citing an index from Global Financial Data that uses proxies for long-term debt that go back centuries, have noted this year’s drop is the worst since a 25% drop in 1788, a year before the U.S. Treasury was established.

Even worse, investors also overlooked the relationship between stocks and interest rates and the “sensitivity of long-duration growth companies to interest rates,” says James St. Aubin, chief investment officer at Sierra Investment Management, a Santa Monica-based investment management company. “It became clear how damaging interest-rate movements can be to technology companies.”

As rates move higher, so do the costs of capital, and that erodes expected future cash flows and drives down valuations. High-growth companies, such as technology companies, are particularly susceptible because they tend to spend heavily to develop products at the expense of profits in their early stages as they aim to build market share. During the TINA—”There is No Alternative”—years following the pandemic lockdowns, when interest rates were rock bottom and liquidity was ample, technology stocks appreciated mightily.

Higher interest rates spelled the end of TINA, and “the money came out as fast as it went in,” says St. Aubin.

Mortgage rates responded immediately to the Fed’s moves and have more than doubled in the past year, sending the housing market into a major tailspin as mortgage applications and refinancings declined, new and existing house sales spiraled lower, and new housing starts dropped to their lowest levels since May 2020. Housing prices remained high, nonetheless, because supply still doesn’t meet demand.

Inflation Matters

There would be no interest-rate increases if inflation weren’t a problem. The massive government stimulus programs that injected trillions into the economy to help keep businesses and households afloat during the early stages of the pandemic and beyond played a big part in driving inflation higher and helped set the stage for the seven rate hikes in 2022.

“The overriding lesson in 2022 is that fiscal policy deserves an equal amount of blame for creating the surge in inflation,” says Phil Orlando, chief equity market strategist for Federated Hermes.

Other contributors include supply chain disruptions stemming from factory shutdowns and worker shortages due to COVID-19. Geopolitics played a role, too, as Russia’s war against Ukraine highlighted Europe’s energy and food vulnerabilities and drove up the cost of those commodities.

“If we had to characterize 2022 by one thing it would have to be the ‘Year of the Existential Crisis in Natural Gas in Europe,’” says Olga Bitel, global strategist at William Blair & Co., a boutique investment management firm. “Rapidly rising inflation on the back of constrained supply chains was abating heading into 2022, explaining why the Fed was sanguine. Then Russia invaded Ukraine and it was questionable whether there would be enough energy in Europe.”

That led to price spikes in oil and natural gas and food and spurred the Fed to fight inflation in earnest.

Passive vs. Active Strategies Matter

And not the way you might think.

For some, 2022 revealed a problem in passive investing strategies that track broad stock market indexes and that have grown popular with investors, as they are typically more tax-efficient and less expensive than actively managed funds.

Buying an index fund or exchange-traded fund tied to a major benchmark such as the S&P 500 in early 2022 gave investors much more exposure than they likely knew of to a group of technology stocks that dominated the index, accounting for about one third of the overall market cap of the index. That represents huge concentration risk. With index funds, there’s also no way to know whether you are overpaying or underpaying for the underlying stocks.

This wasn’t a concern between 2009 and 2018, when stocks rose by nearly 15% a year on average, and even less of a concern from 2019-21 when they rose by 20% as low interest rates fueled demand for stocks.

Now, amid increasing volatility and rising interest rates, investors might be more discerning.

Actively managed funds depend on stock-picking prowess aimed at delivering returns that outperform the benchmark indexes. While many actively managed funds are often found to be “closet indexers,” mirroring closely the very strategy they are trying to beat, they are often free to make moves to protect their portfolios, such as raising cash as many did this year.

“Maybe investors will become more conscious of what they own,” says Forster of Orbis. “Investing is about being skeptical against strong prevailing narratives. Crowds are often wrong and yet they will dictate the price of investments.”


Morningstar Disclaimers:

The opinions, information, data, and analyses presented herein do not constitute investment advice; are provided as of the date written; and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this document. Except as otherwise required by law, Morningstar, Inc or its subsidiaries shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. It is important to note that investments in securities involve risk, including as a result of market and general economic conditions, and will not always be profitable. Indexes are unmanaged and not available for direct investment.

This commentary may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Morningstar or its subsidiaries or affiliates to any registration or licensing requirements in such jurisdiction.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Morningstar, Inc. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

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