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Stock Strategist

Emerging Value in Three Health-Care Stocks?

We're keeping an eye on three firms with growing economic moats.

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Morningstar provides in-depth research reports for a universe of approximately 200 health-care stocks, but only  25 of these firms have been granted the coveted wide-moat designation. Many of our readers are familiar with how we assign economic moats--in a nutshell, it's a process in which we assess the long-term competitive advantages of a firm, as well as its ability to generate strong returns on investment in its business. However, these moats aren't set in stone. Industry dynamics, internal company evolution, and big acquisitions can cause moats to change with time.

When we boost a company from no moat to narrow--or from narrow to wide--it can have a meaningful effect on our fair value estimate. To reflect the firm's improved position, we make various changes to our valuation models; most importantly, we lengthen the time that it can generate superior returns, and we discount future cash flows at a lower rate. For example, taking a look at the health-care sector, we recently boosted  Genzyme's (GENZ) economic moat from narrow to wide, and simultaneously raised our fair value estimate by almost 20%. While this biotech has its roots in rare disease treatments, we now see long-term strength in other segments of its business, increasing our confidence in the firm's continued solid performance.

Karen Andersen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.