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Our Picks

16 Solid Stocks During Rocky Times

This shortlist of high-quality companies with predictable cash flows and modest leverage are well-equipped for today’s market uncertainty.

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Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

The coronavirus pandemic has thrust us into uncharted territory. Many students are engaged at home in e-learning for the first time. Many parents are there, too, balancing working from home and watching their kids. Others, meanwhile, are not working at all, because their employer has shuttered its doors in an effort to slow the spread of the virus.

As more retailers close their brick-and-mortar stores, restaurants evolve into take-out-only businesses, and travel becomes a no-no, it’s natural to wonder: Will there be casualties in business in this economic slowdown? Which companies are best positioned to survive?

Today we’re looking for survivors. To find stocks to fit the bill, we screened for the following:

Wide moats: Firms with wide Morningstar Economic Moats have unmatched advantages that should allow them to fend off their competitors and outearn their costs of capital for the next 20 years. By their very natures, wide-moat companies are reliable in terms of their businesses--think of them as "steady Eddies."

Stable or positive moat trends: To qualify, a company needs to be maintaining or growing its competitive advantages, not facing impossible-to-overcome headwinds that may ultimately threaten its moat.

Low uncertainty: Such companies enjoy sales predictability, modest operating and financial leverage, and limited exposure to contingent events. As a result of these factors, we can more confidently estimate the future cash flows of these companies--and therefore have high confidence in our fair value estimates.

Lastly, we tossed out companies with Poor stewardship ratings, preferring to ride along with management teams that have a proven record of being adept capital allocators.

Not all of these stocks are in buying range according to our metrics. But given the roller-coaster ride the markets are providing, they may be soon.

Here’s a little bit about each from our analysts.

Anheuser-Busch InBev SA/NV (BUD)

Industry: Beverages--Brewers

“Anheuser-Busch InBev has one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators. Vast global scale and near-monopoly dominance in several Latin American and African markets give AB InBev significant fixed cost leverage and pricing power in procurement, especially following the acquisition of SABMiller in late 2016. This plays out in the firm's excess returns on invested capital and best-in-class operating and cash cycles, asset turnover ratios, and working capital management. AB InBev delays payments to trade creditors more than 20% longer than its closest rival Heineken, and its free cash flow conversion has been consistently higher than peers in recent years. Driving AB InBev's profitability is its majority stake in Ambev, the Latin American brewer that generates a whopping near-40% EBIT margin in beer in Brazil.”

Philip Gorham, director

Clorox (CLX)

Industry: Household & Personal Products

“Despite the near-term challenges, we still think the firm boasts entrenched retail relationships, a leading brand mix, and cost edge that should ensure its wide moat proves unwavering. Further, we don't anticipate it will stray from an adherence to categories and markets where it has an advantage and where larger manufacturers have mostly chosen to refrain from garnering a position. In this vein, midsize categories including bleach, charcoal, and trash bags (where it has amassed leading shares of 56%, 54%, and 30%, respectively, as cited by the firm and GlobalData) account for around one third of its total sales.”

Erin Lash, director

Coca-Cola (KO)

Industry: Beverages--Non-alcoholic

“Coca-Cola’s ubiquity and brand resonance in the nonalcoholic beverage category has been going strong for over 130 years, and we see structural dynamics that will ensure this persists. We think that, despite competing in a mature industry, the firm is adequately exposed, either directly or indirectly, to growth vectors such as water and energy drinks. Moreover, we believe Coke will be able to continue extracting incremental value growth from the carbonated soft drink market, even as volumes decline.”

Nicholas Johnson, analyst

Colgate-Palmolive (CL)

Industry: Household & Personal Products

“We think Colgate has garnered a wide economic moat, reflecting its solid brand-intangible assets as well as its cost edge. Colgate's focus on the oral-care category (which has been characterized by a higher degree of customer loyalty, as taste, safety, and conspicuous consumption have a more significant impact here than other areas of the household and personal care space) has helped the firm build a sustainable advantage around the Colgate brand. As evidence, the firm maintains more than 32% worldwide market share in toothpaste (greater than 2.5 times its next-largest competitor and the 1.4% private-label fare has obtained). This leading share position extends to many attractive markets around the world. According to Euromonitor, Colgate boasts more than 40% toothpaste value share in India (above the 12% held by local operator Dabur), 65% in Brazil (versus less than 7% for Unilever and just under 9% for P&G), and 29% in China (above the nearly 14% P&G maintains).”

Erin Lash, director

Diego PLC (DEO)

Industry: Beverages--Wineries & Distilleries

“Diageo was created in 1997 following the merger of Grand Metropolitan and Guinness. Mergers and acquisitions remain part of the firm's DNA, and subsequent transactions--some transformative, others bolt-on--have established Diageo as the global industry leader. Although the industry is fairly concentrated (we estimate a four-firm concentration ratio of 0.6, above many other fast-moving consumer goods categories, including the global brewing industry at 0.5), we believe there is more consolidation to come. Outside the top five firms, the industry is highly fragmented, and regional players often dominate in niche product categories or local markets. These firms present a new wave of merger opportunities for the industry consolidators, including Diageo, to strengthen their presence in emerging markets.”

Philip Gorham, director

Dominion Energy (D)

Industry: Utilities--Diversified

“Dominion Energy changed its name from Dominion Resources in 2017. More importantly for investors, however, the company has also made a strategic pivot. Since 2010, it has focused on the development of new wide-moat projects with conservative strategies, exited the exploration and production business, sold or retired no-moat merchant energy plants, and made significant investments in moaty utility infrastructure. Wide-moat businesses generate about 45% of Dominion's operating earnings versus roughly half before the acquisition of Scana and acceleration of regulated utility investments. The balance of earnings will come from regulated gas and electric utilities with some of the most constructive regulation and attractive growth potential in the country.”

Charles Fishman, analyst

Johnson & Johnson (JNJ)

Industry: Drug Manufacturers--General

“Johnson & Johnson stands alone as a leader across the major healthcare industries. The company maintains a diverse revenue base, a developing research pipeline, and exceptional cash flow generation that together create a wide economic moat. J&J holds a leadership role in diverse healthcare segments, including medical devices, over-the-counter products, and several pharmaceutical markets. Contributing close to 50% of total revenue, the pharmaceutical division boasts several industry-leading drugs, including immunology drugs Remicade, Stelara, and Tremfya, as well as cancer drugs Darzalex and Imbruvica. The medical device group brings in almost one third of sales, with the company holding controlling positions in many areas, including orthopedics and Ethicon Endo-Surgery's surgical devices. The consumer division largely rounds out the remaining business lines, and despite manufacturing issues over the past several years, the group still holds many brands with strong pricing power.”

Damien Conover, director

McCormick & Co (MKC)

Industry: Packaged Foods

“McCormick is the leading spice and seasoning player. It has around 20% share of the $11 billion global market--4 times its next-largest competitor--making it a valuable partner for retailers. Unlike others, McCormick has maintained its brand spend, with research, development, and marketing around 5% of sales, or nearly $300 million annually in aggregate the past few years. Despite the hit to profits, we believe directing resources to these avenues supports the firm's competitive edge, as this stands to enhance the stickiness of its retail relationships. We think the inclusion of RB's leading food brands (Frank's RedHot, French's, and Cattlemen's) will further entrench its position with retail partners reluctant to risk costly out-of-stocks; these relationships, combined with McCormick's existing portfolio of dominant brands and cost edge, underlie our wide moat.”

Erin Lash, director

Nestle SA ADR (NSRGY)

Industry: Packaged Foods

“We believe Nestle has a wide economic moat, supported by its entrenched position with retailers (an intangible asset) and a durable cost edge. Additionally, certain categories, namely pet food and nutrition (17% and 16 % of trading operating profit, respectively), show signs of monetisable brand equity. We forecast adjusted returns on invested capital returning to the midteens in the outer years of our five-year explicit forecast period, despite ROIC dipping modestly below the 12% mark in 2017, a year of severe growth headwinds and portfolio transition that we expect to yield rejuvenated performance. We think the firm's structural baseline returns are in the mid- to high-teen percentage range, and we anticipate that it will generate excess economic profits for at least the next 20 years, supporting our wide moat rating.”

Ioannis Pontikis, analyst

Novartis AG ADR (NVS)

Industry: Drug Manufacturers--General

“With strong positions in multiple key healthcare businesses, Novartis is well positioned for steady long-term growth. Strong intellectual property supporting multi-billion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While upcoming patent losses on anemia drug Exjade and cancer drug Afinitor will weigh on near-term growth, a strong portfolio of drugs along with a robust pipeline should ensure steady long-term growth.”

Damien Conover, director

PepsiCo (PEP)

Industry: Beverages--Non-alcoholic

“For many consumers, the Pepsi trademark elicits images of cola containers and curated ads extolling the brand’s taste superiority versus Coke. While PepsiCo is still a beverage behemoth, its exploits now extend beyond this industry, with Frito-Lay and Quaker products accounting for roughly half of sales and over 65% of profits, by our estimate. A diversified portfolio across snacks and beverages is the crux of many of the company’s competitive advantages, in our view. Though management missteps have stymied recent performance, we believe the confluence of better execution and benefits inherent to its integrated business model has Pepsi poised to reaccelerate profitable growth.”

Nicholas Johnson, analyst

Pfizer (PFE)

Industry: Drug Manufacturers--General

“Pfizer's size establishes one of the largest economies of scale in the pharmaceutical industry. In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer, heart disease, and immunology.”

Damien Conover, director

Procter & Gamble (PG)

Industry: Household & Personal Products

We assign Procter & Gamble a wide economic moat resulting from its intangible assets and cost edge. Given its position as a leading household and personal-care manufacturer (with more than 25% share of baby care, north of 60% of blades and razors, over 25% of feminine protection, and greater than 25% of fabric care), we think P&G is a valued partner for retailers, supporting its brand intangible asset moat source. We believe P&G maintains the resources to bring new products to market (spending nearly 3% of sales or $2 billion on R&D annually) and tout that fare in front of consumers (spending a low-double-digit percentage of sales or about $7 billion annually on marketing) to drive customer traffic into stores and onto e-commerce platforms, which we believe enhances the stickiness of its retailer relationships. In our view, trusted manufacturers like P&G, which operate with a product set that spans the grocery store, are critical to retailers that are reluctant to risk costly out-of-stocks with unproven suppliers. Bolstering its competitive position is the size and scale P&G has amassed over many years, which enables the firm to realize a lower unit cost than its smaller peers, resulting in a cost advantage.”

Erin Lash, director

Reckitt Benckiser Group PLC (RBGLY)

Industry: Household & Personal Products

“We think RB's recent portfolio restructuring will position the company for above-industry growth in the long term. The acquisition of Mead Johnson may not be rich in cost synergies, but it gives RB exposure to another consumer health business with pricing power and wide margins. Price/mix has deteriorated in several food, household, and personal-care categories in recent years, amid greater competition from the hard discounters’ private-label lines and lower barriers to entry in the e-commerce channel. However, consumer health and near-food categories such as infant formula are among the product categories that we believe retain pricing power, and RB’s focus on consumer health and its entry into formula are likely to ensure price/mix remains a growth driver for several years to come.”

Philip Gorham, director

Roche Holding AG (RHHBY)

Industry: Drug Manufacturers--General

“We think Roche's drug portfolio and industry-leading diagnostics conspire to create sustainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic arm.”

Damien Conover, director

Unilever (UN) (UL)

Industry: Household & Personal Products

“We think Unilever has a wide economic moat derived from two sources: its entrenchment in the supply chain of retailers (an intangible asset) and a cost advantage. The firm’s broad portfolio of products across multiple categories and supermarket aisles creates a virtuous cycle of competitive advantages, comprising intangible assets and cost advantages that new entrants simply could not replicate. Unilever’s portfolio spans multiple household and personal product categories as well as food and, to a lesser extent, beverages, and the firm generates over EUR 50 billion in revenue. This makes Unilever one of the most important suppliers to retailers globally and differentiates it from narrow-moat competitors with smaller product portfolios.”

Philip Gorham, director

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