Add bull markets to the list of things that we wish would never end. Indeed, 2021 was another great year for U.S. stocks. As we approach its end, the Morningstar U.S. Market Index is up more than 22% for the year to date as of this writing.
Given the strong performance of the stock market this year, it’s not surprising that the 10 best-performing wide-moat stocks of 2021 our analysts currently cover have posted eye-popping returns--all in excess of 60%.
As a refresher, we assign wide Morningstar Economic Moat Ratings to only the highest-quality companies, those we think can outearn their costs of capital over the next two decades. The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company with an economic moat can fend off competition and earn high returns on capital for many years to come.
Also not surprisingly, most of the stocks on the list are currently fairly valued or overvalued according to our metrics. Just one--Wells Fargo (WFC)--is trading in 4-star buying range. Here’s what our analyst has to say about the bank.
Star Rating: 4 stars
Economic Moat: Wide
Moat Trend: Stable
Fair Value Uncertainty: Medium
"Wells Fargo remains one of the top deposit-gatherers in the United States, even after the bank's scandals and an asset cap, with the third most deposits in the United States, behind JPMorgan and Bank of America. Its strategy historically rested on deep customer relationships and sound risk management, and being perfectly positioned for the mortgage market after the financial crisis didn't hurt, either. We don't see the boost from the mortgage business ever coming back, and the bank's operational competence has been questionable for years, but we still see a bank with the right fundamentals in place and the potential to improve over time.
"Wells Fargo arguably has one of the best branch networks in the U.S., excels in the middle-market commercial space, and has a strong advisory network. This gives it many of the right pieces for a solid franchise, but operational execution, satisfying regulators, and restoring some operational efficiency remain issues that need to be solved. We expect it will take many years before Wells has fully optimized its current franchises. This is not dissimilar to what many of the largest banks went through after 2008, where it took years to fully recover and optimize operations and returns.
"The first step in Wells Fargo's continuing road to recovery is getting the asset cap removed. We expect this may be a 2022 event, and we're hopeful it may be a first-half-of-2022 event. Once the cap is removed, it will once again be able to grow its balance sheet and return to some form of offense instead of constantly being on defense. Along the way, the bank needs to become a more efficient operator. This will be a multiyear process, and management has outlined roughly four years of initiatives that should save billions of dollars along the way. We expect that even after these programs are complete, the bank will remain one of the least-efficient operators under our coverage, but returns should improve over time nonetheless, and we wouldn't be surprised to see more cost savings identified along the way.
"Wells Fargo remains a work in progress and is also very sensitive to interest rates, and it will take years to better optimize the franchise."
Eric Compton, senior analyst
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