Underperformance Doesn't Equal Cheap
These no-moat stocks haven't posted impressive results during the last year, but that doesn't mean they are undervalued.
It is no secret that we are big fans of economic moats at Morningstar. Our stock analysts spend a lot of time assessing individual firms' competitive positioning to determine if they have a structural, sustainable advantage that will allow the company to earn well more than its cost of capital and to keep competitors at bay for decades. This is a high bar to clear. Only 156 firms in our coverage universe have a wide moat, Morningstar's highest moat rating.
But successful stock investing is about more than just finding the best companies. You also have to make sure that you aren't widely overpaying. A very expensive stock, no matter how good its underlying business, is not going to do wonders for your long-term performance. For years, investors could have the best of both worlds. Wide-moat stocks were consistently undervalued, sometimes significantly so, while no- and narrow-moat stocks were often overvalued. Unfortunately for investors, that is no longer the case. As I wrote about a few weeks ago, strong stock performance from wide-moat companies has left those stocks fully valued. There are a few pockets of value remaining but nowhere near the number of screaming buys compared with just a few months ago.
Bearemy Glaser does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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