Morningstar StockInvestor editor Matt Coffina offers some of his new investment ideas following a quarterly rebalancing of the Wide Moat Focus Index. 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.<br/><br/><b>[0:00:03]</b> ... For Morningstar, I'm Jeremy Glaser. We recently made some changes to our <b>Wide</b> <b>Moat</b> Focus Index. I'm here with Paul Larson, the chief equities strategist and also the editor of Morningstar StockInvestor , to see which <b>wide</b>-<b>moat</b> 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 <b>Wide</b> <b>Moat</b> Focus Index is and what it holds? Larson: Sure. Well, the <b>Wide</b> <b>Moat</b> Focus Index is an index that holds exclusively <b>wide</b>-<b>moat</b> stocks. When we are constructing the index, we take our cohort of <b>wide</b>-<b>moat</b>-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 <b>wide</b>-<b>moat</b> 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 ... <br/><b>[0:02:00]</b> ... recent earnings. But we still think that this company has a wide <b>economic</b> <b>moat</b>. It has outstanding management; actually, the CEO is one of our finalists for the CEO of the Year award for [2012]. And ... <br/><b>[0:04:05]</b> ... richer? Larson: Well, it's certainly become easier to make it into the <b>Wide</b> <b>Moat</b> Focus Index. This particular time the cut-off to make it into the index was 0.84 on the price/fair value metric, or you can say a 16% discount to fair value is all that the <b>wide</b>-<b>moat</b> stock needed to trade at in order to make it in [the index]. This time last year it needed to trade at 0.77 or below on the price/fair value scale. It's easier to make it in last time than it has been historically, and frankly, this is because <b>wide</b> <b>moat</b> stocks have done, as a group, relatively well in 2012. Actually, we're in a relatively rare time where <b>wide</b>-<b>moat</b> stocks are actually trading at a higher median price/fair value ratio than some of the lower-quality stocks in our coverage universe. That ... <br/> No economic moat lasts forever. In the case of Berkshire Hathaway BRK.A BRK.B, we've historically awarded the firm a wide moat rating based on the moat characteristics inherent in its collection of businesses, as well as the company's record of consistently investing the cash provided by its ... We are initiating coverage on Core Labs CLB with a wide economic moat and a $135 fair value estimate. Our fair value estimate implies a forward 2013 EV/EBITDA multiple of 18 times and a 2013 P/E multiple of 26 times. We forecast EBITDA of $353 million in 2013 and $394 million in 2014. We consider ... By Morningstar : by Michael Corty, CFA We believe IHS ( IHS ) has a wide economic moat as the company faces minimal direct competition and has pricing power based on its must-have information to locked-in customers. We think IHS is one of the most intriguing growth stories in our coverage universe, ... Paychex has an unyielding wide moat that has produced steadfast investment returns. After attending McDonald's MCD 2011 investor meeting, we are more confident than ever about the company's wide economic moat and ability to capture incremental market share regardless of the economic backdrop. McDonald's already possesses the strongest brand among global restaurant operators, and ... With Baxter's BAX pending acquisition of Swedish dialysis firm Gambro, we now think the firm has established a wide economic moat around its diverse portfolio in biotech and medical products. Gambro strengthens Baxter’s competitive advantages in renal disease beyond its current in-home peritoneal ... The 2009 CEO of Year built a wide moat business by carefully consolidating a fragmented, but profitable, industry.<br/><br/><b>[0:00:37]</b> ... company and created an industry juggernaut that we think has a wide <b>economic</b> <b>moat</b>. Glaser : What does Stericycle do exactly? Larson : They are a medical waste services company. They go around to hospitals and dental offices and they gather the waste and dispose of the waste, and also recycle when appropriate. Glaser : What was Mark Miller do to carve out [a <b>moat</b>]? It sounds like a commodity business. Could I just buy a truck and go out and start collecting medical waste? Larson : ... <br/><b>[0:01:30]</b> ... factors we think that the company has been able to create a <b>wide</b> <b>moat</b> for itself. This was a small company, and through Mark Miller's leadership they were able to acquire over 170 other medical waste ... <br/> Morningstar's Pat Dorsey on why it's worth paying up a little bit for a wide moat business versus a no moat business.<br/><br/><b>[0:01:08]</b> ... make it more valuable to you today as a shareholder. Whereas the no <b>moat</b> business where you might see returns on capital starting high, but then coming down very, very quickly as competition comes in and pulverizes it--well, all else equal, that's just worth less today in present value terms. So, it's reasonable to pay up a little bit for a <b>wide</b> <b>moat</b> business versus a no <b>moat</b> business. Now, does that mean a <b>wide</b> <b>moat</b> business is worth two times a no-<b>moat</b> business? Hardly, but it is worth a bit more and this is why you often hear, this company deserves to trade at a premium, a quality company is trading at a premium, that's sort of jargon on Wall Street. And what that is, is basically getting at this intuition that a business that is able to compound cash at a high rate of return for many years is worth more today in present value terms. Because the bottom line is that over-estimating a <b>moat</b>, thinking there is a <b>moat</b> when there isn't one, results in basically you paying for value creation that never materializes. If you over-estimate a <b>moat</b>, if you think there is a <b>moat</b> there and its not, well you pay up a lot for the stock because it's priced as if it can generate high returns on capital for many, many years, but it doesn't, and your investment winds up frankly turning out pretty poorly--ass anybody who invested say in say, Crocs at the top found out, or anybody who invested in Motorola, when people thought the RAZR – if you remember the RAZR, a very thin flip phone – people thought that it was going to save the company's bacon. At the end of the day, it was just another phone. It wasn't a <b>moat</b>, even though this stock was priced like one. But on the flipside here, underestimating a <b>moat</b>, probably results in opportunity cost. If you underestimate the <b>moat</b>, you don't think the company has one, but it really does, and you don't pay up a little bit for the stock. ... <br/><b>[0:03:23]</b> ... of Wal-Mart's competitive advantages. So, that's what happens when you underestimate the <b>moat</b>. You say, when we're going to pay this much for the stock, when really its probably worth paying a little bit more, ... <br/><b>[0:04:42]</b> ... enabled McDonald's, with what we would think of as actually having a <b>wide</b> <b>moat</b>, to be able to bounce back from troubles that would have leveled most other restaurant companies. So, that's really the value of an <b>economic</b> <b>moat</b> as an investor. It results in more value creation over time, and it's a fall-back position for the company. It's something that the company can use to help rebuild itself when it hits temporary troubles that would level a no <b>moat</b> business. So, at the end of the day, moats do matter, we think, in the investment process. They are not the end ... <br/>