Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jason Stipp and Jeremy Glaser | 12-26-2014 06:00 AM

Friday Five: Wide-Moat Outperformers From 2014

Wide-moat stocks have performed better than the market overall as investors sought stability in a fully valued market.

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five.

Through Dec. 22, wide-moat stocks have done better than the S&P 500, and a few of them have done really well.

Here to talk about five of those outperformers is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: Wide-moat stocks have outpaced the S&P so far this year. Why do you think that is?

Glaser: It hasn't been a dramatic outperformance, but I think it can be partially explained by a flight to quality. Investors who have looked at some troubling headlines or are worried about overall market valuations or what's happening in the global economy, might see these wide-moat stocks that have more stable cash flows, that are more predictable, as a safer place to put their money than more-speculative names.

Stipp: Health care had a lot of outperformers; there was a lot of M&A in health care. Wide-moat Allergan and Actavis were among some of those top performers.

Glaser: They were actually the two top performers of wide moats this year, and really it was M&A that was driving that. Allergan will be acquired by Actavis after a bit of a bidding war. That brought Allergan stock up, but it also brought Actavis up quite a bit.

We think this runup in Actavis actually is well substantiated. We have raised our moat rating from narrow to wide on the company. We think that as a combined entity, it has much stronger competitive advantages. We also raised our fair value estimate substantially. So even after that big runup in Actavis, we still think that shares are in 5-star territory and could be compelling.

This was just one of many health-care M&A deals this year. This was a big story throughout 2014, as companies potentially were looking to do tax inversion deals. They realized there could be some substantial tax savings through M&As. Or they were looking for scale. Sometimes it's a bit cyclical in health care, but right now scale is seen as something that's a real positive, so firms are trying to build that, and I think that it's a trend that we may not have seen the end of yet.

Stipp: Over in the tech sector, Facebook had a really good year, up 45% so far.

Glaser: It was a big year for Facebook, and it was really driven by mobile.

One of the question marks on Facebook at the IPO was, will they be able to translate the success they've had on desktop over to mobile? And they've really answered that they can. They have a lot of mobile users now who are using native apps; they are able to serve ads to them and are getting good rates on those ads, and that's something that investors have cheered.

This has been a story among a lot of tech and media companies. Are they able to make this transition from a desktop world into one that is more driven by apps, more driven by mobile, more driven by the cloud? Will they be able to manage this transition, or are they going to be left behind? The answer to that question has been driving a lot of the returns of these firms over the last year.

Rick Summer, our Facebook analyst, does think that shares look a little bit pricey right now, but he does say that given how much Facebook is investing in its future and in long-term growth, there is a chance that you could have a few quarters that don't look so great--maybe the stock could sell off. There might be an opportunity for a better entry point for investors sometime in the near future.

Stipp: You call wide-moat Berkshire Hathaway a bit of a "quiet giant" in 2014, and perhaps maybe even doing a little better than Buffett expected?

Read Full Transcript

{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article