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3 High-Quality Stocks to Buy Now

These wide-moat stocks are all trading at least 25% below their fair value estimates.

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Rarely does quality go on sale. Just ask the millennial who wants to propose with a Tiffany diamond, the kids who want to buy mom that Prada tote she has always wanted, or the parent who'd like to spend less than $200 on the latest Lego Star Wars Assault on Hoth set.  

Yet quality is on sale in the market today. According to Morningstar's Market Fair Value chart, the price/fair value ratio for the median stock our coverage universe is 0.99, suggesting that the market as a whole is fairly valued. Specifically, no-moat stocks--or those we deem to have no significant competitive advantages--are about 3% overpriced. Conversely, those stocks with wide moats--or strong competitive advantages--are undervalued: They're trading at a median price/fair value of 0.94. In other words, the average high-quality stock is 6% underpriced today. (Learn more about our economic moat ratings here.)

We powered up Morningstar's Premium Stock Screener to find the best values among these high-quality companies. We screened for wide-moat stocks trading at a 25% discount or more to their fair value estimates. We also demanded that these stocks carry low to medium uncertainty ratings, because we only want companies whose fair value estimates our analysts were most confident in.

As of this writing, 10 stocks made the cut. Premium members can access the full screen  here. Three of the most undervalued wide-moat stocks appear below.

 Sanofi (SNY)
Current rating: 4 stars
Price/fair value: 0.73
Fair value uncertainty: Medium

Drugmaker Sanofi earns a wide moat based on the stable cash flows generated by its diverse portfolio of vaccines, drugs, and consumer products. Granted, the company's largest drug, Lantus, represents 17% of total sales. 

"We expect new products will mitigate the eventual generic competition and given the complexity of manufacturing insulin, we don’t expect a rapid decline in Lantus sales," says sector director Damien Conover.  

In an effort to diversify further, Sanofi recently bid to acquire Medivation, which manufactures Xtandi, for prostate cancer. Conover thinks the acquisition makes sense at the right price. 

"Medivation would propel Sanofi back into the cancer market, where strong pricing power should help drive long-term growth."

Shares of the wide-moat company currently trade at a 27% discount to our fair value estimate. 

"Sanofi shares look undervalued, particularly as the market looks concerned Sanofi will overpay to acquire Medivation," says Conover.

 Visa Inc (V)
Current Rating: 4 stars
Price/fair value: 0.74
Fair value uncertainty: Medium

When it comes to the digital payment market, Visa is king of the hill. The company earns its wide economic moat rating thanks to a powerful network effect. Explains senior equity analyst Jim Sinegal: "A payment method widely accepted by merchants is attractive to cardholders, while a payment method used by many cardholders is attractive to merchants. Thus, each additional user of the Visa brand increases its value to others." 

Yet Visa is experiencing a soft fiscal 2016. Slowdowns in energy- and commodity-dependent economies such as China and Brazil--as well as lower gasoline prices in the U.S. reducing volumes--have taken a toll on results. Management expects net revenue growth of only 7% to 8% for the full fiscal year, down by 3 percentage points because of the strength of the U.S. dollar against foreign currencies. 

Given the less-than-stellar short-term picture, it's not surprising that Visa's shares are trading at a 26% discount to our fair value estimate. Yet Sinegal sees no weakness in Visa's business model and expects revenues to increase after 2016. 

"In a world in which the number of digital payment transactions is constantly growing, this wide-moat company should flourish," he says.

 Walt Disney (DIS)
Current Rating: 4 stars
Price/fair value: 0.74
Fair value uncertainty: Medium

Media conglomerate Disney is two distinct yet complementary businesses rolled into one. The media network business includes ESPN and ABC; the Disney-branded businesses include parks, filmed entertainment, and consumer products. The world-class Disney brand is well-known and embraced by parents and children alike. Moreover, ESPN remains the dominant player in sports entertainment. As a result, the cable sports channel can charge high subscriber fees and generate sustainable profits.

Although second-quarter results were mixed, with sales and earnings coming in below forecast, Morningstar analyst Neil Macker thinks the company's story remains intact. 

"Disney has mastered the process of monetizing its world-renowned characters and franchises across multiple platforms," he says. Those platforms include its parks and resorts, merchandising, TV programming, and even Broadway shows. In addition, Disney acquires and creates new franchises and intellectual property--such as the Pixar, Marvel, and Star Wars franchises--which attract adults who may have outgrown the company's traditional characters. 

"Each new franchise deepens the Disney library, which will continue to generate value over the years," he says.

Macker also believes the media network business will adeptly adapt to the changing media landscape. He expects the loss of subscribers at ESPN and other pay TV channels to be slightly offset by per sub affiliate fee increases domestically and international growth. Macker also thinks new bundles will provide a boost to the segment. 

Disney’s shares currently trade at a 26% discount to our fair value estimate. 

"With the stock trading in the 4-star range, it may offer an attractive entry point for investors with a longer-term investment horizon," says Macker.


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