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Stock Strategist

Five Companies We Love

Here's a quintet of well-managed wide-moat firms.

As investors with access to around-the-clock cable television news and an ever-increasing amount of information on the Internet, it's all too easy to get distracted by the headlines we come across each day: quarterly earnings, new product launches, brokerage upgrades and downgrades, and daily gyrations in the market. Sometimes it pays to step back and ask some more-basic questions: Is it a good business? Is the management team on your side? These questions aren't easy to answer, but getting them right can make a huge difference in the quality of your portfolio over time.

For today's Stock Strategist, we focused on two of the more-qualitative aspects of stock investing, both of which are central to Morningstar's investment approach. First, we screened for companies that earn a Stewardship Grade of A, our highest grade. These grades are designed to measure how well company boards and management teams fare in demonstrating a commitment to shareholders and acting as stewards of investor capital. These grades are based on three key areas: transparency of reporting, shareholder friendliness, and overall stewardship, including management incentives and equity ownership. Morningstar's analysts have assigned Stewardship Grades to approximately 1,400 companies, 78 of which receive grades of A.

We then narrowed the list to focus on companies with wide economic moats, which we love to see in potential investment opportunities because they help fend off competitors and sustain above-average returns on capital. Twenty-four companies made the final cut as of Oct. 20, 2005. Many of the companies on the list earn middling Morningstar Ratings, meaning we'd wait for a larger margin of safety before investing in the shares. For example,  Qualcomm (QCOM), meets the criteria but earns only a 1-star rating because the shares are trading above our estimate of fair value. But a handful of companies on the list offer both great fundamentals and reasonably attractive stock prices. Below are some of the highlights. (Special note: During's Premium Stock Research Week--Oct. 24-30--you are invited to view all of's Stock Analyst Reports free of charge. Click here for more information.)

Renaissance Re Holdings (RNR)
Morningstar Rating: 5 Stars
Business Risk: Above Average
This season's hurricanes could dent Ren Re in the short run, but we like the firm's long-term prospects. From the  Analyst Report: "Renaissance Re is the creme de la creme of reinsurance. Renaissance's wide moat originates in highly technical underwriting and specialist catastrophe knowledge, which is embedded in proprietary underwriting models. Ren Re strives to develop the deepest catastrophe risk insights, then it selectively employs its unique knowledge in markets offering the highest returns because the pricing is inefficient. Its underwriters zealously capture and analyze data to gain superior pricing insights by isolating key loss drivers. Best of all, Ren Re underwrites reinsurance for other firms on an outsourced basis. This lets it earn additional fees with minor incremental investment, which further increases returns on capital."

Microsoft (MSFT)
Morningstar Rating: 5 Stars
Business Risk: Below Average
We don't think competition from a new alliance between  Google (GOOG) and  Sun Microsystems  will have much of an impact on this technology bellwether. From the  Analyst Report: "The past few years have been a legal morass for the world's largest software company, but we think Microsoft shareholders will be rewarded for their patience. The firm's core software franchises are as dazzling as ever, and the introduction of Windows Vista and a new version of Office will add another chapter to Microsoft's long history of growth. In addition, Microsoft's $6-$7 billion annual research and development budget dwarfs those of competitors and ensures the continued innovation that spurs software upgrades."

Fidelity National Financial (FNF)
Morningstar Rating: 4 Stars
Business Risk: Average
We applaud Fidelity National's recent strategic moves. From the  Analyst Report: "We're giving a big thumbs-up to Fidelity National Financial's plan to merge subsidiary Fidelity National Information Services (FNIS) with  Certegy (CEY), as we believe the transaction transfers value to Fidelity. We also think the distribution of 17.5% of Fidelity National Title Group (FNT) will prove favorable. Fidelity has been augmenting its dual wide-moat platform via a program of acquisitions and financial engineering, and it looks like there's plenty more to come."

Bank of America (BAC)
Morningstar Rating: 4 Stars
Business Risk: Average
Third-quarter results appeared solid at Bank of America. From the  Analyst Report: "Bank of America is a retail banking juggernaut capable of throwing off very good profits, in our opinion, when it isn't busy buying competitors. Bank of America has a lot going for it. It owns a huge, low-cost deposit base, a well-respected brand name, and the nation's most attractive retail banking network. Its coast-to-coast branch system--concentrated in fast-growing Western and Southern states--has 90% more locations than its nearest rival, and its domestic deposit base is more than twice as large as the number-two institution. Plus, because its product lines skew toward consumers and small businesses, B of A's results are less volatile and its credit quality is more predictable than other large banks that prefer to cater to large corporations. The net result of all these strengths is a bank that has thrown off returns on tangible equity that have averaged 23.7% over the past 10 years, an excellent result."

Iron Mountain (IRM)
Morningstar Rating: 3 Stars
Business Risk: Below Average
Iron Mountain recently boosted its international presence by acquiring Pickfords Records Management, which operates in Australia and New Zealand. From the  Analyst Report: "Robust competitive advantages and a highly capable management team bode well for Iron Mountain's long-term prospects. Iron Mountain charges recurring rental fees to store its customers' files, and then generates additional revenue every time a customer wants to retrieve, move, or dispose of a box. The number of cartons the company stores is rising steadily; volume from existing customers grows about 5% per year. Operating margins should also improve as the company fills more capacity in its warehouses and offsets the administrative costs associated with its larger sales team. We are not overly concerned by the company's sizable long-term debt, which could be reduced in short order by slowing growth-related spending. Also, the Iron Mountain brand is widely respected, an added advantage given the sensitivity of clients' documents and a climate of heightened security."

To run this screen and see all the stocks that passed, click  here. Note: The stocks mentioned above passed our screen as of Oct. 20, 2005. The results of the screen may change daily due to price fluctuations or other factors. After clicking, you can save the search to use later by clicking the "Save Criteria" button in the bottom right-hand corner of the screen.

Click here for more information on's Premium Stock Research Week--Oct. 24-30.

John Novak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.