15 New Stocks in the Wide-Moat Focus Index
We review the adds and drops from the latest reconstitution as well as the index's cheapest names today.
Relatively speaking, 2018 was a good year for the Morningstar Wide Moat Focus Index. The index lost just 0.74% last year. In comparison, the broader Morningstar US Market Index shed more than 5%; the S&P 500 dipped 4.38%.
In an effort to keep the index focused on the least expensive high-quality stocks, we reconstitute the index regularly. The index consists of two subportfolios containing 40 stocks each, many of which are overlapping positions. The subportfolios are reconstituted semiannually in alternating quarters, on a "staggered" schedule. We re-evaluate the index's holdings and add and remove stocks based on a preset methodology. Because stocks are equally weighted within each subportfolio, the reconstitution process also involves right-sizing positions.
After the most recent reconstitution on Dec. 21, half of the portfolio added 15 positions and eliminated 15. The index now holds 49 positions.
Concerns about a U.S.-China trade war pressured tech stocks in the fourth quarter: The Morningstar Technology index fell more than 18%. It's therefore no surprise that several high-quality tech names pepper the list of additions, including Applied Materials (AMAT), Blackbaud (BLKB), Facebook (FB), Intel (INTC), and KLA-Tencor (KLAC).
Sector director Brian Colello notes that the near-term prognosis for semiconductor stocks, in particular, is weak compared to the past couple of years, but we foresee no slowdown in demand for more processing power, connectivity, and sensing capabilities--all good news for the industry.
"We generally view these cyclical downturns as times to buy high-quality leaders, as such firms remain well-positioned to weather the storm," he concludes.
Financials are well represented on the list of additions, too, with BlackRock (BLK), Charles Schwab (SCHW), State Street (STT), T. Rowe Price Group (TROW), and Jones Lang LaSalle (JLL) added during this reconstitution. Weak market performance in 2018 fueled negative sentiment toward asset managers, in particular.
"We think that asset managers should be able to count on appreciation in their assets under management and that some concerns, such as large pricing cuts among active equity managers, are overblown," says sector director Michael Wong.
Four stocks-- CVS Health (CVS), Franklin Resources Franklin Resources General Electric (GE), and L Brands (LB) --were removed because their economic moat ratings were downgraded to narrow from wide since the last reconstitution of this subportfolio in June. Read more about those downgrades here. Express Scripts was removed, as it was acquired by Cigna (CI).
The remaining 10 stocks were removed because their price/fair values fell outside of our buying range.
Several of the price-based removals hail from the healthcare sector: Eli Lilly (LLY), Merck (MRK), Amgen (AMGN), and Pfizer (PFE). Healthcare stocks were among the best performers in 2018: The Morningstar Healthcare index finished the year up 5.91%. Sector director Damien Conover says the relative outperformance owes to diminished concerns around pricing pressures. He also notes that at year end, there were comparably few buys in the sector.
The consumer defensive sector is also well represented, with Procter & Gamble (PG), Colgate-Palmolive (CL), Hershey (HSY), and PepsiCo (PEP) making the list of drops. The sector held up pretty well during the fourth quarter; the Morningstar Consumer Defensive index was down just 6% versus a 13.52% drop for the S&P 500.
High-Quality Stocks in the Bargain Bin
The table below lists the 10 cheapest stocks in the Morningstar Wide Moat Focus Index as of Jan. 17.
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.