4 High-Quality Stocks Now in Buying Range
Recent sell-off has driven several wide-moat stocks into 5-star territory.
What a way to start a new year!
Spreading fears about the health of China's economy and volatile oil prices have triggered a stock sell-off in the U.S. market: This week, the major U.S. indexes are down about 5%.
Few would say the market overall is a screaming bargain, despite the pullback: The median stock in Morningstar's coverage universe is still close to fairly valued, at 0.91 after Thursday's close.
That said, 4 high-quality stocks moved into 5-star territory this week, putting them into buying range. These stocks all possess wide moats, meaning that they have sustainable competitive advantages.
Premium Members who would like a list of new 5-star stocks delivered to their inbox each day can register to receive our daily 5-Star Stock Update e-newsletter here.
One of our favorites in that space is Union Pacific. Morningstar's Keith Schoonmaker writes about how management has successfully boosted profitability despite demand fluctuations:
"Union Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial deregulation in 1980, as the railroad eliminated unprofitable routes and gained efficiency during industry consolidation. Rails have improved performance by rightsizing assets, reducing crew size, and deploying technology. UP is surprisingly nimble for a huge asset-based enterprise: When 2009 carloads slid 16%, UP cut costs faster than sales declined, then set record operating ratios in 2010, 2012, 2013, and 2014. Even a 9% coal carload decline in 2013 couldn't keep UP from reaching record margins. UP also reached record margins when contending with a rapid influx of volume during mid-2014, although velocity and terminal dwell suffered somewhat."
Amgen (AMGN) has been facing challenges as many of its drugs are vulnerable to competition, but we see the firm's wide moat as stable. Morningstar's Karen Andersen notes that:
"To address these headwinds, Amgen has invested heavily in more efficient manufacturing and has undertaken a massive cost-cutting program, both poised to improve margins. Amgen's own large biosimilar pipeline and low manufacturing costs could make it a viable competitor in this nascent market, as well.
"However, Amgen's newest drugs and its pipeline will also be key to countering these challenges. Prolia (osteoporosis) and Xgeva (fracture prevention in cancer patients) were approved in 2010, and each should see $2 billion in peak sales. Kyprolis--acquired with Onyx in 2013--is poised to become a $2 billion product in multiple myeloma."
Overall, she sees value in this low-uncertainty firm.
Twenty-First Century Fox
Many media firms have been under pressure recently as concerns that cord cutters were going to threaten their business model. But Morningstar's Neil Macker thinks that the value of Twenty-First Century Fox's (FOX) video content will still grow over time. He writes:
"Twenty-First Century Fox possesses a vast array of media enterprises worldwide. We believe the company enjoys strong competitive advantages based on its worldwide cable networks, along with its film and television studios.
"The filmed-entertainment segment generates a number of hit television programs and movies annually. Fox owns both robust film franchises and a strong television production studio, both of which are important given our premise that the value of quality content will increase. Its studios currently produce 70% of the prime-time slate on Fox and the majority of the original programming on its cable channels, while also creating programs for other networks such as Modern Family on ABC. The critical acclaim for the studio's content, along with its willingness to place shows on the right outlet, creates a virtuous cycle which retains the creators of the studio's hit shows and attracts new creators to the platform."
Swatch (SWGAY) has been under pressure over concerns of waning demand for Swiss watches and long-term concerns over the rise of smart watches. However, Paul Swinand still sees plenty of value in the firm. He writes:
"Swatch Group has evolved into the world's largest and most diverse manufacturer, marketer, and distributor of timepieces, managing a portfolio of Swiss watch brands in addition to its namesake brand and supplying components to the Swiss watch industry. It has created a vertically integrated structure, controlling each aspect of the design, procurement, manufacture, and assembly of its products. Innovation, engineering, and fashion drive the firm's culture equally, and continuous improvement permeates the portfolio of 20 watch brands. We believe that the equity in the brands of Swatch Group is one of the firm's key competitive advantages, with all the aspects of the production and distribution contributing to these powerful intangible assets but also to cost advantages in watch production. Such advantages generate positive economic returns and support our view that the firm has a wide economic moat, signifying our confidence that the firm's high returns on capital should continue over the long term."
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.