10 Undervalued Wide-Moat Stocks
The cheapest stocks in the Morningstar Wide Moat Focus Index—plus stocks the index has recently added and dropped.
The Morningstar Wide Moat Focus Index tracks companies that earn Morningstar Economic Moat Ratings of wide whose stocks are trading at the lowest current market prices relative to our fair value estimates.
How has this collection of undervalued high-quality stocks performed this year? Pretty well: The index has beaten the broad-based Morningstar US Market Index for the year to date by nearly 6 percentage points as of this writing. The undervalued wide-moat stocks included in the index have beaten 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 investors looking for high-quality stocks trading at cheap prices.
These are the 10 most undervalued stocks in the Morningstar Wide Moat Focus Index as of June 23, 2022.
The most undervalued stock on the list, Meta Platforms, is trading 59% below our fair value estimate as of this writing, while the last on the list, Amazon.com, is trading 41% 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 14 stocks and eliminated 14 stocks.
These stocks were added to the Morningstar Wide Moat Focus Index on June 17, 2022.
Three industries each—technology, financials, and industrials—had four stocks added to the index. In particular, the additions from the technology sector aren’t surprising, given the drubbing tech stocks, as a group, have endured this year.
These stocks were removed from the Morningstar Wide Moat Focus Index on June 17, 2022.
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, for instance. Nearly 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. That being said, these stocks shouldn’t be considered stocks to sell per se. In fact, most of these stocks are still trading in what we’d consider buying range; they’re just not as undervalued as the stocks added to the index at the time of the reconstitution.
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 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. For a deeper dive into the concept of economic moats, read What Makes a Moat? And to learn more about (or get a refresher on) Morningstar’s approach to buying stocks, visit Morningstar’s Guide to Stock Investing.
Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.