9 New Stocks in the Wide Moat Focus

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 , and specialty pharmaceutical firm  Allergan .  

Consumer cyclical stocks also did well during the period, with gains from retailers  Lowe's (LOW) (up 16.5%),  Tiffany (up 23.8%), and  Amazon.com (AMZN) (up 13%) boosting performance. 

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  shed 6.93% during the period; biotech  Gilead Sciences (GILD) fell 5%; and  Bristol-Myers Squibb (BMY) lost nearly 4%.

Click here to see the top 25 positions in the index. (Premium members can see  all 47 positions.)  

Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.