Four Wide-Moat Stocks for a Faltering Recovery

One of the enduring features of the recovery has been the outperformance of no-moat stocks compared to wide- and narrow-moat firms otherwise known as the junk rally. During the last three months, this trend is slowly turning around. Wide-moat firms are beginning to outpace our broader coverage universe.

This shouldn't be terribly surprising given the backdrop of the last quarter. No-moat companies haven't built sustainable competitive advantages, so they are subject to the whims of the broader market. Therefore when the outlook for the economy looked bright, so did the outlook for these firms pushing their stock prices higher.

Moat-worthy businesses on the other hand are more stable. Although they are certainly exposed to economic conditions, their cash flows tend not to fluctuate as much. This held shares back to an extent when things looked better as investors chased higher growth.

Total Return Wide Moat Narrow Moat No Moat 1 Month 2.03  0.57 0.69 3 Month -4.85 -5.63 -6.51 YTD -3.6 -0.11 2.92 1 Year 8.89 13.14 17.95 3 Year -6.29 -6.26 -751 5 Year -0.71  0.69 0.25

 

With Federal Reserve and others now saying that growth is going to be slower than expected, the relative stability of wide-moat business is attractive again. Even in a stalled economy these are businesses that should be able to continue to produce decent cash flow.

Fortunately for investors wide-moat stocks are also the cheapest right now, and there are plenty of high-quality firms trading at deep discounts to their intrinsic value. Our staff of equity analysts believes that wide-moat stocks are 14% undervalued compared with 7% for narrow-moat firms and 3% for no-moat companies.

To find some of these cheap names, we used the  Premium Stock Screener tool to look for wide-moat stocks with Morningstar Ratings of 5 stars. You can run the screen for yourself  here to see the complete list. Below are four stocks that passed.

 Procter & Gamble (PG)
From the  Premium Analyst Report:
Procter & Gamble's size confers tremendous benefits in terms of distribution, brand reach, and scale with suppliers, but the goliath was caught flat-footed in its response to the dramatic downturn in consumer spending. With a new CEO at the helm, however, P&G has implemented plans to reinvigorate top-line and earnings growth, and we remain confident that the household products stalwart will be able to reposition itself for a more challenging economy. At its core, P&G possesses unprecedented skills in consumer understanding, marketing, and brand-building, and, the firm's slow reaction to the downturn notwithstanding, these skills haven't wavered.

 Abbott Laboratories (ABT)
From the  Premium Analyst Report:
On the foundation of a wide lineup of patent-protected drugs, a leading diagnostics business, a strong nutritional division, and an emerging vascular group, Abbott Laboratories has dug a wide economic moat. We expect these operating lines will continue to generate strong returns and drive growth. Further, the company's adept skills at partnerships and acquisitions will probably add to internal growth.

 Paychex (PAYX)
From the  Premium Analyst Report:
Paychex was formed through the consolidation of 17 payroll-processing companies in 1979 and has been one of the most successful human resources outsourcing firms in the United States. The minimal amount of capital required for operations and the firm's significant competitive advantages have allowed it to produce returns on invested capital that have averaged 70% during the past 10 years. High customer-switching costs, inherent scalability, and a respected brand image are the main drivers of the firm's wide economic moat, and we believe they form a potent combination that will last for some time to come.

 Spectra Energy 
From the  Premium Analyst Report:
Spectra is one of the largest midstream companies in North America, with a favorably positioned asset footprint that should continue to foster attractive internal growth opportunities for years to come. Spectra Energy is a pure play on natural gas demand. Its operations stretch across all links in the natural gas value chain, with the exception of riskier exploration and production. With large positions in gathering and processing, transportation and storage, and distribution, Spectra collects a large portion of economic rents paid to get gas to end users.