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Stock Strategist

Five More Hidden Stock Gems

We've picked up coverage of several wide-moat firms in recent months.

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At Morningstar, we've hired (and continue to hire) scores of stock analysts to help us increase the number of companies we follow and rate. We now have close to 1,400 companies under coverage, nearly double the number we had at the beginning of the year.

As Pat Dorsey said in a similar column in May, "When you pan more gravel, you find some gold." Below are excerpts from the Analyst Reports of five of the more interesting companies we found during our last few months of prospecting. All of them have garnered our wide economic moat rating and are worth keeping on the radar.

 Apollo Group (APOL)
Analyst: Fritz Kaegi
"Apollo Group's University of Phoenix (UOP) franchise is a cash-flow machine with great growth prospects and a government-subsidized wide moat. Along with Strayer Education STRA, it stands out among education firms for its focus on working adults, its students' financial stability, and its prized regional accreditation. We'd eagerly buy Apollo at a modest discount to our fair value estimate. ...

"Results have been extraordinary: Enrollment at all of Apollo's campuses grew from 6,000 in the mid-1980s to 45,000 by 1995 and 130,000 by May 2004. Returns on invested capital for campuses have been north of 60% since the early 1990s. UOP's online unit does even better. It's grown from 3,300 students in 1997 to 109,000 currently, and enrollments are growing at a 50% annual rate. ... Capital invested in this side of the business is returning better than 150%. Apollo's wide moat makes these profits defensible." Read the full  Analyst Report.

 Cadbury Schweppes (CSG)
Analyst: Mark Hugh Sam
"We have assigned a wide-moat rating to Cadbury because of the strength of its niche in the beverage business as well as its brands in confectionery.

"Cadbury owns a global distribution network and many powerful brand names, which are the keys to making sweet money in the candy trade. The acquisition of Adams helped Cadbury ... to the number-one position in the $100 billion worldwide confectionery market. Unlike its competitors, Cadbury boasts strong brands in all confectionery segments: Cadbury in chocolate, Halls and Trebor in sugar candy, and Trident and Dentyne in gum. In addition, the firm owns a slew of strong regional and local brands. It holds the number-one or -two confectionery position in 24 countries, including the United Kingdom and France." Read the full  Analyst Report.

 Buckeye Partners (BPL)
Analyst: Michael Cumming
"Pipelines might not be the most dynamic business, but the cash they generate should make investors take notice. At the right price, units of Buckeye Partners are a great way to participate in this stable cash-cow industry. ...

"We have awarded Buckeye a wide moat rating, which is typical of most pipeline companies we follow. These firms enjoy significant barriers to entry, mainly due to regulatory restrictions but also because of the high cost of building new pipelines. Other forms of transportation such as trucks simply can't compete with pipelines and their low cost structure." Read the full  Analyst Report.

 Royal Bank of Canada (RY)
Analyst: Mike Ford-Taggart
"Royal Bank of Canada is a rather dull financial-services firm--no managerial soap opera, no turnaround story, no failed acquisition spree. Indeed, it's so boring and so profitable that we would gladly buy shares if they traded cheaply enough. ...

"We think RBC enjoys a wide moat for a variety of reasons. Most important, it provides a wide scope of financial products, each of which has massive scale. In Canada, RBC originates 14.9% of all residential mortgages and 11.5% of all corporate loans; it is the top provider of individual life insurance, the largest mutual fund provider, and the top investment bank. More than one third of Canadian households have a relationship with RBC, giving it the highest retail penetration of any financial institution in Canada." Read the full  Analyst Report.

 Valassis Communications  (VCI)
Analyst: T.K. MacKay
"Valassis Communications is a finely tuned moneymaking machine. Valassis makes money by delivering coupons for everything from toothpaste to toilet paper, and it is part of an industry duopoly that also includes News America (part of Rupert Murdoch's News Corporation NWS). The free-standing-insert (FSI) business, which is characterized by high operating leverage and barriers to entry, has produced exceptional returns. Thanks to a roughly 45% share of the FSI market, Valassis has produced returns on invested capital (ROICs) in excess of 85% since 1995--incredible compared with the ROICs at most publicly traded firms." Read the full  Analyst Report.

Paul Larson has a position in the following securities mentioned above: APOL. Find out about Morningstar’s editorial policies.