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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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