9 New Stocks in the Wide Moat Focus
We take an in-depth look at the new constituents of Morningstar's Wide Moat Focus Index and highlight the stocks that are most attractive today.
In March, the Morningstar Wide Moat Focus Index swapped out nine stock positions.
To be included in the Wide Moat Focus strategy, a company must have an economic moat rating of wide (which means we think they have advantages that will fend off competitors for at least 20 years), and its shares must be among those trading at the steepest discount to their fair value estimates. (Our fair value estimates are determined through independent research by the Morningstar Equity Research team.) Only U.S. stocks are included in the index.
The index consists of two subportfolios with 40 stocks, which are reconstituted semiannually, but with staggered rebalancing quarterly. After the December reconstitution, half of the portfolio swapped out nine positions. The net result is that the index now holds 47 positions.
The following nine stocks were added to the index:
On the flip side, nine stocks were removed because their price/fair values rose beyond our buy range.
The table below lists the 10 cheapest stocks in the index, ranked by price/fair value. The median stock in the Wide Moat Focus Index is trading at a price fair/value of 0.91. By comparison, our entire coverage universe is trading at a median price/fair value ratio of 1.04--in line with the 52-week high.
Digging Into First-Quarter Performance
Over the first quarter of 2017 through March 23, the Wide Moat Focus Index returned 6.7%, beating its benchmark, the Morningstar US Market Index, by 175 basis points. It also outpaced the S&P 500 by 142 basis points. After weighing on performance in the fourth quarter of 2016, the index's healthcare bet paid off. The healthcare sector was the biggest contributor to returns over the quarter, as the market's fears of drug pricing regulation have perhaps faded a bit. The index benefited in particular from strong performers such as Big Pharma drugmaker Eli Lilly (LLY), biotech company Amgen (AMGN), infant formula-maker Mead Johnson (MJN), and specialty pharmaceutical firm Allergan (AGN).
It's also interesting to note that the Wide Moat Focus' zero weighting in energy was a big reason it beat broader market benchmarks during the quarter. We haven't identified any competitively advantaged companies that are selling at a discount in the energy space for quite a while. And in fact, even after the sector has fallen 8.6% for the year to date through March 23 due to sagging oil prices, the median energy stock under our coverage is still fairly overvalued in our view, trading at a price/fair value of 1.07.
Basic materials hurt performance worse than any other sector this quarter. Among individual stocks, rock-salt producer Compass Minerals (CMP), down 13.6%, was the biggest laggard.
And although the healthcare weighting was a big positive contributor in recent weeks, not all bets in the sector paid off. Pharmacy benefit manager Express Scripts (ESRX) shed 6.93% during the period; biotech Gilead Sciences (GILD) fell 5%; and Bristol-Myers Squibb (BMY) lost nearly 4%.
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Karen Wallace does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.