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By Jason Stipp | 12-09-2010 06:00 AM

Larson: High Quality Is Still on Sale--Including This Pick

Momentum has propelled the junk rally so far, but eventually investors will see the relative attractiveness of higher-quality company valuations, says Morningstar's Paul Larson.

Jason Stipp: I'm Jason Stipp for Morningstar.

It's Ideas Week on Morningstar.com, and today we're talking about defensive ideas. When I think about defensive stock ideas, I naturally think "wide moats." So, of course, I want to check in with Morningstar's Paul Larson, editor of Morningstar StockInvestor and core stock investing strategist.

Thanks for joining me, Paul.

Paul Larson: Glad to be here.

Stipp: So, defensive stock ideas, the performance trends on some of these stock areas haven't been so hot recently. Can you tell me a little bit about what you are seeing and how some of these wider moat or more defensive areas have performed?

Larson: Well, it's interesting when you look at mutual funds, and you look at the different categories and how they've performed. In general, the small category has beaten the large category by quite a large margin, and then also, growth has beaten value by a fairly large margin. And you look at these categories, and the small growth is actually the best performing category and large value is the worst performing category.

Another way to look at these is to look at Morningstar's economic moat rating. When you bucket our companies by wide moat, narrow moat, no moat, the no moat stocks have actually done the best thus far in 2010 followed by the narrow moats and followed by the wide moats, which have actually done the worst so far in 2010.

This is a trend that we saw start in early 2009, basically March 2009 is when the so-called junk rally began. It was a very sharp reversal from what we saw in 2008, where the defensive stocks, the wide moat stocks, outperformed the no moat stocks by a very large margin. And ever since that early 2009 point, we've seen the exact opposite.

Stipp: It's very good to keep that in context. I think it's easy to forget about some of the performance that maybe we saw before and just look recently and see what performance has been. So, good to keep those wide moat stock ideas in mind for that reason.

What are you seeing on the sector front, because I know that we can also get a sense for where investors are putting their money and what's hot right now, and we're seeing similar trends play out there, right?

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