Four Wide-Moat Stocks on Sale

With the stock market retreating last week, an unusually high number of stocks jumped to 5 stars. All in all, there were more than 60 stocks that crossed the 5-star threshold (for the complete list, click  here), including many high-quality names, such as  Pfizer (PFE) and  Walt Disney (DIS). These two, and the other firms mentioned below, carry Morningstar's wide-moat rating--a status assigned to the firms that, in our opinion, have the most durable competitive advantages over their peers. As these companies' stocks rarely trade at a suitably large discount (margin of safety) to our fair value estimate, we welcome the opportunity to add them to our bargain bin.

To get a  complete tally of the wide-moat stocks that have recently jumped to 5 stars--as well as our  full list of 5-star stocks--including our consider buying and selling prices, risk ratings, and moat ratings--simply take Morningstar Premium Membership for a test spin. Click here to sign up for a free trial.

Pfizer
Moat: Wide | Risk: Avg | Price/Fair Value Ratio*: 0.74 | Three-Year Expected Annual Return*: 21.3%

What It Does:  Pfizer  (PFE) is the world's largest pharmaceutical firm, with annual sales near $50 billion. Prescription drugs account for more than 90% of the company's revenue. Top sellers include cholesterol-lowering Lipitor, Celebrex for arthritis, Viagra for impotence, and Lyrica for epilepsy and some types of neuropathic pain. Recently approved drugs with blockbuster potential include oncology drug Sutent and Chantix for smoking cessation.

What Gives It an Edge: According to Morningstar analyst Damien Conover, Pfizer's wide economic moat stems from a robust portfolio of patent-protected drugs and a massive salesforce. Furthermore, Pfizer's enormous cash flows combined with strong scientific know-how afford the firm plenty of opportunities in developing the next generations of drugs.

What the Risks Are: Pfizer faces generic competition, an increasingly stringent Food and Drug Administration, and stronger managed-care negotiating power. Several of its blockbuster drugs are nearing the end of their patent exclusivity periods. New drug development to fill these gaps has become challenging with a more risk-conscious FDA. Additionally, managed care has grown over the past two decades into a powerful entity that can negotiate lower drug prices. While more remote, litigation risks remain, as evidenced by  Merck's (MRK) ongoing cases involving Vioxx.

What the Market Is Missing: Conover believes the market has placed too much emphasis on the company's weak Phase III pipeline and patent losses on several blockbusters. While he expects Pfizer will likely generate flat to slightly down top-line growth over the next 10 years, Conover believes the company can employ external strategies to grow sales. With over $22 billion in cash, Pfizer can acquire growth opportunities through acquisitions. Through internal advancement and acquisitions, Pfizer's Phase III pipeline should grow over the next 18 months. This should increase the market's cash flow projections and boost the firm's stock.

Walt Disney
Moat: Wide | Risk: Below Avg | Price/Fair Value Ratio*: 0.82 | Three-Year Expected Annual Return*: 17.1%

What It Does:  Disney (DIS) owns the rights to some of the most famous characters ever created, including Mickey Mouse, Winnie the Pooh, and the Muppets. These characters and others are featured in several theme parks that Disney owns or licenses around the world. Disney makes live-action and animated films under several labels and owns or has a stake in several popular television networks, including ABC, ESPN, Lifetime, and A&E. Disney owns and operates dozens of TV and radio stations in the U.S.

What Gives It an Edge: Since creating Mickey Mouse in 1928, Walt Disney has developed some of the most popular and enduring animated franchises of all time. In addition to creating and exploiting great content, the company controls a large library of films and owns the powerful Disney and ESPN brands. Morningstar analyst Larry Witt believes these competitive advantages result in a wide economic moat.

What the Risks Are: New technologies are jeopardizing business models throughout the media sector and could still diminish Disney's profitability. Advertisers have been moving money out of cable television, which could cause a slowdown in Disney's important media network business. These ad-supported networks, along with the theme parks and consumer products, could also suffer in the event of an economic recession. Making movies is a hit-or-miss business, which could result in big swings in profitability.

What the Market Is Missing: In addition to creating great content, Disney has been very successful in exploiting that content through box office and home video sales, television network licensing, sequels, theme park attendance, and merchandising. As content migrates to digital platforms, Disney looks to find new ways to attract and retain customers. To that end, the firm has been very aggressively distributing its content through its own Web site and third parties such as iTunes. The market, however, is preoccupied with Disney's other major media property, ABC. The rise of cable television, the emergence of the Internet, and the proliferation of DVRs is leading to lower ratings for the major networks, including ABC. However, Witt estimates that ABC represents less than 10% of Disney's operating income and is not a significant driver for his fair value estimate.

Other New 5-Star Stocks
 Cadbury Schweppes (CSG)
 Paychex (PAYX) 

* Price/fair value ratios and expected returns calculated using fair value estimates, closing prices, and cost of equity estimates as of Friday, Nov. 9, 2007.