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By Matthew Coffina, CFA and Jeremy Glaser | 09-23-2015 03:00 PM

13 New Stocks Join the Wide Moat Focus Index

Out-of-favor media and railroad names replaced several energy equities in Morningstar's index of most-undervalued wide-moat stocks, says Morningstar's Matt Coffina.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Matt Coffina--he's the editor of Morningstar StockInvestor newsletter. We're going to look at some recent changes to the Morningstar Wide Moat Focus Index and if investors can learn anything from it.

Matt, thanks for joining me.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: Could you give us a little bit of background about what this Wide Moat Focus Index is? What's in it?

Coffina: Sure. The Wide Moat Focus Index holds 20 wide-moat stocks that are trading at the cheapest discount to fair value in our coverage universe. Then, we rebalance it quarterly, and we equal-weight between these 20 stocks. Basically, it's a collection of high-quality companies trading below what we think their intrinsic value is.

Glaser: We did recently have a rebalance. What were some of the big changes? What came into the index?

Coffina: Turnover was unusually high this quarter. Thirteen different stocks exited and entered the index and, in all cases, the stocks that left the index exited because of valuation. In some cases, we cut our fair value estimates. In some cases, the stocks ran up. But in any case, we just take whatever the 20 cheapest stocks are, and sometimes that can cause high turnover. That was the case this quarter.

Glaser: When you look at what that bar was, how cheap does a stock have to be to be in that top 20?

Coffina: The stock would need to have a price/fair value ratio of 0.79, which is about as low as it's been in quite a number of years. Often, we have been picking between roughly fairly valued stocks until recently, but the market pullback in August and especially some sectors in particular that have pulled back much more sharply than others have finally created some decent discounts in the market. And that's reflected, I think, in this list.

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