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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.

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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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