Some Wide Moat Values Still Available
Not all stocks charged back into fairly valued territory after October's rally.
After a tough third quarter, October was a good month for stocks. Over the trailing four weeks ending Oct. 30, the major indexes gained 8%-9%, perhaps putting a crimp in bargain-hunters' plans. (But even a month ago, when trailing three-month returns were much worse, it was hard to say the market as a whole was cheap.)
Indeed, after the dust settled, the median stock in Morningstar's coverage universe is still close to fairly valued, at 0.96 as of Oct. 30. But not all stocks have shot back into fairly valued territory. There are some remaining pockets of opportunity among specific firms.
We used Morningstar's Premium Stock Screener to sift through our coverage universe to find high-conviction picks that still have negative three-month returns despite October's recovery. To find firms with sustainable competitive advantages, we added the criterion that firms have wide economic moats. We then screened for stocks that were trading in 4- or 5-star territory. We added a final criterion, stocks with fair value uncertainty of medium or low, to find the equities with fair value estimates in which we are most confident.
As of Oct. 30, 56 stocks made the screen. We've highlighted a few of our high-conviction picks below.
Three-month return: negative 8.9% | Morningstar Rating:
The pharma and biotech sectors have recently faced significant market weakness, largely because of recent headlines about price gouging, strong policy positions from presidential candidates, notably Hillary Clinton, and congressional investigations into drug pricing, said equity strategist Karen Andersen in a recent Stock Analyst Report. But the pullback has created some opportunities for potential investors, in Andersen's opinion. Wide-moat Biogen remains among Morningstar analysts' best ideas in the sector due to its diversified portfolio and innovative pipeline--and, in particular, the firm's growing profitability in the multiple-sclerosis market.
Three-month return: negative 8.0% | Morningstar Rating:
Monsanto shares got a drubbing as the firm reported weaker-than-expected fourth-quarter results, alongside plans to eliminate 2,600 jobs. In particular, the company is facing headwinds from currency, elevated costs, and lower glyphosate pricing, notes senior equity analyst Jeffrey Stafford. "Although these factors are likely to hold back growth in 2016, we don't think they damage Monsanto's long-term growth prospects. Notably, management is sticking to its long-term target to more than double earnings per share from 2014 to 2019. We think this speaks to the competitive positioning of Monsanto's products and the opportunities for seed-technology growth, given necessary yield improvements globally," he said.
Applied Materials (AMAT)
Three-month return: negative 2.8% | Morningstar Rating:
Amid a challenging macro environment, Applied Materials' management reported weak third-quarter earnings results and adjusted fourth-quarter revenue guidance downward. For the past few months, shares of the semiconductor-equipment supplier have been in the dumps. But equity analyst Abhinav Davuluri believes that Applied's competitive advantage remains intact due to its position as the top vendor in the semiconductor-equipment market, and at 4 stars, the share price represents an opportunity for long-term investors. Though he notes that the cyclical nature of the chip industry, as well as the display and solar markets, is a ubiquitous threat to equipment suppliers, Davuluri believes "Applied's expansive product portfolio and large installed base will allow the firm to comfortably weather business cycles over time, and [he expects] the company to experience decent growth over the long term."
Jason Stipp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.