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10 Undervalued Wide-Moat Stocks

The cheapest names in the Morningstar Wide Moat Focus Index--plus stocks the index has recently added and dropped.

Susan Dziubinski 5 April, 2022 | 4:38AM
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Castle with moat

The Morningstar Wide Moat Focus Index tracks companies that earn Morningstar Economic Moat Ratings of wide and that are trading at the lowest current market price to fair value. How has this cluster of high-quality names performed over time? Pretty well: The index has beaten the broad-based Morningstar US Market Index for the year to date and for the trailing three-, five-, and 10-year periods as of this writing.

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

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. We re-evaluate the index's holdings and add and remove 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 on March 18, half of the portfolio added 11 positions and eliminated 11 names. 

Additions

Three industries had more than one stock added to the index.

Two software companies made the list. Adobe (ADBE) dominates when it comes to creative software, and we expect it to continue to do so. Moreover, its well-rounded portfolio positions it as a digital market leader, says senior analyst Dan Romanoff.

ServiceNow (NOW) not only earns a wide moat rating but boasts a positive moat trend, too. We think the company has done an exceptional job of expanding beyond its software-as-a-service solution for IT service management into the larger IT operations management market, says Romanoff.

The subportfolio also added two asset managers. BlackRock (BLK) is the largest asset manager in the world, and an expanding ETF market; the adoption of environmental, social, and governance analytics and investing; and ongoing technology efforts, among other factors, should continue to drive growth, says strategist Gregg Warren. T. Rowe Price (TROW), meanwhile, remains the best-positioned active asset manager we cover in the United States, he argues. The size and scale of the firm’s operations, the strength of its brands, consistent outperformance, and reasonable fees give it an edge.

Two internet retailers were added, too. Etsy (ETSY) has carved out an interesting competitive niche with its four marketplace properties focused on unbranded products, says analyst Sean Dunlop. The firm’s competitive strategy is sound, and its active buyer base is growing.

MercadoLibre (MELI) is a one-stop e-commerce solution for Latin American buyers and sellers. Customer expectations for quicker shipping times and increased fulfillment penetration should make the firm’s services all but irreplaceable, says Dunlop.

Exhibit 1

The remaining additions hail from a hodge-podge of industries: 3M (MMM) (conglomerates), Costar Group (CSGP) (real estate services), Ecolab (ECL) (specialty chemicals), Masco (MAS) (building products and equipment), and Teradyne (TER) (semiconductor equipment and materials).

Removals

Stocks can be removed from the index for a few reasons: If we downgrade their economic moats or if their price/fair value ratios rise significantly. All of the removals in the latest reconstitution were pushed out by stocks that were trading at more-attractive price/fair value ratios at the time of reconstitution.

Exhibit 2

High-Quality Stocks in the Bargain Bin

Here are the 10 cheapest stocks in the Morningstar Wide Moat Focus Index as of March 24.

Exhibit 3

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
3M Co115.62 USD2.12Rating
Adobe Inc294.97 USD3.41Rating
BlackRock Inc591.30 USD3.24Rating
CoStar Group Inc73.77 USD2.47Rating
Ecolab Inc153.55 USD2.96Rating
Etsy Inc110.20 USD4.96Rating
Masco Corp50.31 USD3.67Rating
MercadoLibre Inc948.25 USD7.47Rating
ServiceNow Inc411.55 USD5.06Rating
T. Rowe Price Group Inc113.26 USD4.18Rating
Teradyne Inc81.67 USD3.79Rating

About Author

Susan Dziubinski

Susan Dziubinski  Director of Content for Morningstar.com

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