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Investing Specialists

What Stocks Might Jensen Be Buying?

Screening our stock universe using Jensen's guidelines produced some interesting results.

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By Brett Horn | Associate Director of Equity Research

Within Ultimate Stock-Pickers, we try to marry our equity research with the approaches and stock selections of managers we admire in order to add an additional layer of validation to our stock picks. One of the managers we track is the team that runs  The Jensen Fund (JENSX). Because of the fund's strict and transparent investing philosophy, Jensen offers us a unique opportunity to compare its investment approach to our own and generate specific investment ideas by combining the fund's guidelines with Morningstar stock analysis.

The Jensen Approach
Jensen governs itself by sticking to a very simple and rigorous stock-selection criterion. The fund only invests in companies that have earned a 15% return on equity (ROE) every year for the last 10 years. The point is to limit the fund's holdings to companies that are consistent value creators. We at Morningstar also believe in focusing on quality companies, and Jensen's approach tracks fairly closely with our concept of economic moats. We prefer to use return on invested capital (ROIC) as an indicator of a moat, though, as ROICs eliminate any potential distortions in ROE through the use of debt on the balance sheet. That said, ROE is a data point that's much easier to grab, and useful as long as investors avoid situations where companies have propped up their ROEs through excessive leverage.

The Morningstar Ultimate Stock-Pickers Team does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.