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High-Quality Stocks on Sale

Market volatility has an underappreciated silver lining--the chance to buy some of the best companies in the world at a discount.

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After enduring several consecutive days of triple-digit losses from the Dow Jones Industrial Average, investors sighed with relief on Tuesday as stocks rallied. But the relief was short-lived: By Tuesday's close, the market tumbled once again, and stocks finished the day lower.

Market volatility may hang around, at least for a while. As site editor Jason Stipp has noted, worries about China, global growth, and the timing of interest-rate moves by the Fed may keep investors on edge over the short term. Moreover, stocks aren't screaming bargains, even after the recent rout: According to Morningstar's Market Fair Value Graph, the market was only 11% undervalued prior to market open on Tuesday. In comparison, the market's fair value tumbled to 0.55 during 2008-09, meaning that stocks were 45% undervalued during that period. Given how well stocks have performed during the past several years--on Tuesday, the S&P 500 still boasted a five-year annualized return of more than 12%, despite recent declines--one can argue that stocks may still be frothy.

Continued volatility in the market can have a silver lining, though: It may provide bargain-hunters with a buying opportunity. If market stress continues, investors may have a chance to add high-quality companies to their opportunistic portfolios--those "fun money" or "mad money" portfolios that aren't necessarily tied to a specific goal, other than to make money.

To come up with a shortlist of candidates, we used's Premium Stock Screener to find high-quality stocks trading at a discount. We focused exclusively on wide-moat stocks, because these companies have built unassailable competitive advantages that should allow them to thrive in a variety of market environments. We then looked for wide-moat companies with low fair value uncertainty ratings--meaning that our analysts have a high degree of conviction in the fair value estimates they've assigned to these stocks. As of Tuesday, 21 stocks with wide moats and low uncertainty ratings were trading in 4- or 5-star range. Premium Members can access the entire list here.

Here are four of the names that slipped into 5-star range before market open on Tuesday. These stocks may fall back to 4-star range if the market rallies but are nonetheless stocks to keep on the radar.

Allergan (AGN)
Fair value estimate: $370
Allergan is one of the largest manufacturers of pharmaceuticals. Analyst Michael Waterhouse acknowledges that Allergen is a company in flux, after its merger with Actavis and with the forthcoming sale of its generics segment. He nevertheless raised his fair value estimate on the company to $370 per share from $330 in early August. "Allergan possesses an industry-leading portfolio in the specialty markets of ophthalmology and aesthetics, which enjoy much higher barriers to entry and lower risk of generic competition than most pharmaceutical products," he says. "The company also has an extensive presence in the primary-care market, with a significant ability to leverage new products in its portfolio with little incremental cost."

Amgen (AMGN)
Fair value estimate: $194
Though Amgen's expertise has historically been in renal disease and cancer-supportive-care products, today the company is a leader in biotechnology-based human therapeutics. "Amgen markets several blockbuster biologic therapies in the oncology and immunology markets, giving it the intangible assets that form the foundation of its wide moat," says analyst Karen Andersen. By investing heavily in more efficient manufacturing and undertaking a massive cost-cutting program, Amgen is poised to improve margins, she adds.

ITC Holdings (ITC) (
Fair value estimate: $42
ITC Holdings is the only publicly traded pure-play independent electric-transmission company in the United States. In addition to receiving wide-moat and low uncertainty ratings, ITC Holdings also boasts a stable moat trend--meaning that its competitive advantages are solid and not at risk of declining anytime soon. Given the heady capital costs for new transmission lines, competitors have little incentive to build lines to compete with ITC, notes analyst Charles Fishman. "ITC's transmission businesses located in the central U.S. are poised to benefit from new natural gas-fired power plants and wind farms replacing coal-fired plants in the coming years," he adds.

Procter & Gamble (PG) (
Fair value estimate: $90
Not surprisingly, the world's leading consumer-products manufacturer--whose brands include Tide laundry detergent, Charmin toilet tissue, and Pampers diapers--earns a wide moat. Nevertheless, the company faces some challenges, notes analyst Erin Lash. Sales have been lackluster, due to P&G entering too many new markets too quickly, and a few failed new products. Lash still believes P&G can right the ship: "P&G's announcement that it intends to shed around 100 brands--more than half of its existing brand portfolio ... indicates it is parting ways with its former self, looking to become a more nimble and responsive player in the global consumer-products arena. We view this as a particularly important trait given the stagnant growth emanating from developed markets and the slowing prospects from emerging regions." Lash thinks P&G can return to posting mid-single-digit annual sales growth and, as such, thinks its shares are undervalued.

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