Three Stocks for a Volatile World

It is a bit of an understatement to say that the last few weeks have been a tumultuous time in the global markets. A stream of bad news from around the world sent markets wildly undulating and provided an unexpected white-knuckle ride for investors.

Markets began to get nervous as Congress debated raising the debt ceiling right up to the last minute. The U.S. did manage to avoid default, but the deficit reduction measures that accompanied the increase weren't enough to stave off a sovereign debt downgrade from Standard & Poor's. Compounding matters, economic indicators began to soften during the same period, stoking fears that the U.S. economy was careening toward a new recession.

The steady drip of bad news coming out of the U.S. also had the impact of putting a renewed focus on the escalating European sovereign debt crisis. It became increasingly clear that the current crop of stabilization funds and vague promises would be insufficient to contain the problem to peripheral countries like Greece, Ireland, and Portugal. And some anemic economic reports in the region deflated any hopes that growth would solve the crisis without the eurozone needing to make serious structural changes.

Throw in an unusual Fed promise to keep rates at nearly 0% until at least the middle of 2013 and the real beginning of the 2012 campaign cycle and you truly have a recipe for volatility. At one point it seemed that 500 point shifts in the Dow on any given day were no longer a big deal. Thankfully the markets have calmed somewhat in the intervening days, but there is still a tremendous amount of uncertainty in the air.

So what should a stock investor do? We've talked to a number of experts and fund managers both within and outside Morningstar to get a good read on that question. Although everyone had their own take, two major themes emerged.

1. This is not 2008. Although there are wild swings in the market, we aren't on the precipice of another Great Recession. It's clear that the global economy is facing big challenges, but the catastrophic collapse of the financial system (which was a very real possibility in 2008) appears to be off the table.

2. Buy high-quality stocks. Given the forces working against the global economy, quality becomes more important than ever. That is to say firms with strong competitive advantages and gold-plated balance sheets will be able to withstand the pressure better than economically sensitive firms in commodity businesses. In order words, look for wide-moat stocks, with low or medium uncertainty ratings. Of course wide-moat doesn't eliminate risk, or volatility, but these stocks should hold up relatively better.

Fortunately for investors, after the sell-off more of these blue-chip stocks are trading at big discounts to their fair value estimate. Using the Morningstar  Premium Stock Screener we identified more than two-dozen wide-moat, low or medium uncertainty firms that are currently rated 5 stars. Premium members can run the screen themselves by  clicking here. Below are three firms that passed.

 BlackRock (BLK)
From the  Premium Analyst Report:
With more than $3.6 trillion in assets under management, BlackRock is the largest asset manager in the world. A diverse product portfolio and the ability to offer both active and passive strategies give the firm a huge leg up over its competition. With much of its managed assets sourced from institutional clients, BlackRock has a stickier set of managed assets than most of its peers. The firm is also more diverse geographically, with clients in more than 100 countries and close to 40% of its AUM coming from investors living outside of the United States and Canada. These attributes have allowed BlackRock to dig what we believe is the widest economic moat in the asset-management industry.

 Pfizer (PFE)
From the  Premium Analyst Report:
Pfizer's foundation remains solid, based on strong cash flows generated from a basket of diverse drugs. The company's large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business.

 Oracle (ORCL)
From the  Premium Analyst Report:
Oracle has astutely leveraged its dominance of the database software industry to become a major provider of enterprise software solutions. The recent acquisition of Sun has enabled the firm to further its strategy of providing complete IT solutions to its clients. We believe that the firm has the scale, resources, and expertise to remain at the forefront of the consolidation of the enterprise software industry.