More High-Quality Stocks Now in Buying Range
Recent selling in the U.S. equity market has driven a handful of wide-moat stocks into 5-star territory.
The U.S. stock market just can't seem to shake off its fears. On Wednesday, the major indexes suffered their biggest losses in three months. The Dow and S&P 500 are both down more than 7% for the year-to-date through Wednesday, while the Nasdaq is off more than 9%.
As we've mentioned before, the market isn't a screaming buy even after the shellacking. Nevertheless, the turmoil this week has driven five high-quality stocks into 5-star territory. These stocks all possess wide moats, meaning that they have sustainable competitive advantages.
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In her latest report, Morningstar strategist Karen Andersen notes that several multiple sclerosis products and cancer drug Rituxan are driving Biogen's growing profitability. The firm's specialty-market-focused drug portfolio and pipeline create a wide economic moat.
"Biogen has achieved strong profitability on the success of three marketed products in the fields of oncology and neuroimmunology, and the introduction of Tecfidera secures the firm's dominant share of the MS market. We think barriers to entry for potential biosimilars to Biogen's products are high, and Biogen has a strong R&D strategy for maintaining its leadership in MS, where pricing power is strong, patient need for novel therapies is high, and the pipeline has been particularly productive. These factors contribute to the firm's wide moat. Returns on invested capital, which we think will average above 20% during our 10-year explicit forecast period, easily exceed our 7.5% estimate of Biogen's cost of capital."
Allergan, meanwhile, is planning to merge with Pfizer (PFE). Some investors may be concerned that the U.S. government will try to stop the deal in an attempt to keep Pfizer domiciled in the Unites States, but we think the deal will go through. Writes health-care sector director Damien Conover:
"The Pfizer and Allergan merger should reinforce the wide moats that both companies bring independently. Allergan's industry-leading portfolio in the specialty markets of ophthalmology and aesthetics enjoys much higher barriers to entry and lower risk of generics than most drugs. Also, Allergan has limited product concentration risk, with only two drugs representing a high level of total sales: Botox and Restasis account for nearly 16% and 8% of revenue, respectively, following the generics sale to Teva. Botox's complex manufacturing and strong brand power should keep generics at bay for an extended period."
VF's portfolio of lifestyle brands include The North Face, Timberland, Vans, Lee, and Wrangler. In her latest report, senior equity analyst Bridget Weishaar explains why VF earns a wide moat--and why she thinks that moat will persist:
"VF has established a broad and growing array of leading lifestyle brands, carefully selected to enhance its presence in high-growth categories and for synergies within existing operating units. We believe management will continue to make acquisitions with an eye toward strengthening its brand leadership and will continue to invest heavily in existing brands through branding campaigns, marketing, product development, and in-store experiences--the basis for our wide moat and positive trend rating."
State Street (STT)
State Street, one of the largest providers of institutional financial services in the country, stands to benefit from rising rates, according to senior equity analyst Erin Davis. In her latest report, she writes:
"State Street is one of the two largest custodian banks in the United States, built on a series of large acquisitions begun in 2003. As a dominant player, now boasting more than $28 trillion in assets under custody, State Street has the scale and scope necessary to serve institutional clients, which few competitors can hope to match. Asset custody and asset servicing is a business with naturally sticky customers who are loath to risk changing providers and who value the one-stop shopping that State Street can provide. As such, it is a naturally high-return and highly scalable business. Despite these advantages, revenue growth has been a challenge in recent years as a result of persistently low interest rates and increasing client attention on fee levels. We expect that fee levels to stabilize as the economic environment improves and that investors will see the benefit of the business' operating leverage as net interest margins eventually normalize. We expect returns on equity to improve from 9.7% in 2014 to around 15% in the medium term."
Enterprise Products Partners (EPD)
The midstream sector has sold off sharply, and continued volatility in oil prices and rising interest rates could provide headwinds this year. That said, analyst Peggy Connerty notes that Enterprise Products Partners is a top pick in this sector, and we expect it to outperform its midstream peers. She writes:
"Enterprise Products Partners is one of the premier pipeline partnerships in the master limited partnership sector, with best-in-class assets that are positioned to monetize every link of the midstream value chain. While negative natural gas liquids fundamentals affect the partnership's commodity-sensitive gas processing and NGL marketing, overall the natural gas and NGL supply build has been a boon for Enterprise's fee-based businesses. EPD is poised over the long term to take advantage of the low-cost domestic NGL growth by aggregating natural gas supply and funneling it through its fully integrated gathering, transportation, processing, and fractionation systems and then transporting these products to domestic end user markets or exporting the products to international markets."
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.