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By Jeremy Glaser and Paul A. Larson | 12-19-2012 12:00 PM

A Rare Time for Wide-Moat Stocks?

StockInvestor editor Paul Larson details recent changes to Morningstar's Wide Moat Focus Index, noting how the rally in wide-moat names could have them more fairly priced than lower-quality stocks.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We recently made some changes to our Wide Moat Focus Index. I'm here with Paul Larson, the chief equities strategist and also the editor of Morningstar StockInvestor, to see which wide-moat stocks have entered the index and which ones have left.

Paul, thanks for joining me today.

Paul Larson: Glad to be here.

Glaser: Can you tell us a little bit about what the Wide Moat Focus Index is and what it holds?

Larson: Sure. Well, the Wide Moat Focus Index is an index that holds exclusively wide-moat stocks. When we are constructing the index, we take our cohort of wide-moat-rated stocks and we limit it to those that trade in the United States. And we also exclude master limited partnerships because those don't really fit into the index structure so well.

Our beginning cohort is 114 companies this time around. We take those wide-moat U.S.-traded stocks, and we rank order them on the price/fair value ratio. And to create this index, we simply take the 20 cheapest stocks among that rank order and equal weight the index. We rebalance and reconstitute it every three months, and that's the index in a nutshell.

Glaser: So, there are six names that are entering in this time. What are some that are notable?

Larson: One of the notable names that's going in is Berkshire Hathaway, and this company has been in the news lately regarding a one-time buyback that the company made as well as raising the limit that it would be willing to repurchase shares. But ahead of that news, we raised our fair value estimate by $10. So, our fair value estimate is $110 on the B shares, and that made it, in that rank order, trading at enough of a discount to make it into the index this time around.

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