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Commentary

Finding Stability Amid Europe Woes

These cheap firms with competitive advantages should help investors ride out the latest shock of volatility from Europe.

News from Europe rattled the markets yet again this week. As expected, Nicolas Sarkozy is packing his bags at the Elysee Palace, and Greece is struggling to put together a government stable enough to implement reforms needed to keep the country in the eurozone. The Morningstar U.S. Index lost more than 3% during the week and is down nearly 2% during the last four weeks. The decline has created some new opportunities for investors, but a fair deal of caution is warranted.

The fall in stock prices is not entirely unwarranted by the shifting fundamentals of the European political landscape. The chances that the eurozone will fall apart in a disorderly fashion have greatly increased from just a few weeks ago. Even if Greece manages to stay in the currency union over the short term, the uncertainty is still creating headwinds for the real economy in Europe.
 Cisco Systems (CSCO)  provided a perfect example earlier this week. The tech giant provided a disappointing outlook, primarily because it is seeing demand from European companies disintegrate as CEOs take a wait-and-see approach on new investment. Until there is more confidence about the future of eurozone, growth on the continent is going to be subpar, and volatility will remain the name of the game.

So does this incredible level of uncertainty mean that investors should pack up and move into cash? No. It just means that stock investors need to be even more concerned about stock selection and valuation. Buying a great business at a hefty discount to its intrinsic value isn't going to eliminate volatility in your stock portfolio. But certain firms should be strong enough to withstand the buffeting winds and live to produce cash flows long after the European crisis is behind us. Of course, the cheap price also gives you a buffer in case things end up much worse than currently seems possible.

Fortunately for investors, the sell-off during the last few weeks has created some attractive buying prices for shares of companies that have competitive advantages. To find these names, we used Morningstar's  Premium Stock Screener to uncover companies with Morningstar Ratings for stocks of 5 stars and with narrow or wide moats. We also made sure that these names have seen a decline in stock price during the last month. You can  run the screen for yourself here. Below are three names that passed the screen. 

 Expeditors International of Washington (EXPD)
Moat: Wide | Fair Value Uncertainty: Medium | 1-Month Return: -14%
From the  Premium Analyst Report:
Expeditors International of Washington is the performance leader among non-asset-based freight-forwarding and third-party logistics, or 3PL, providers. Investors seeking exposure to the growing international shipping market will be hard-pressed to find a more profitable, long-run-focused firm. Expeditors holds a mountain of cash, owes no debt, and produces strong cash flows while deploying nearly no assets. We believe Expeditors' record of steady growth, high margins, and high returns on invested capital supports a wide economic moat that will deliver the goods to shareholders for years to come. Expeditors' only unlovable trait is its normally rich valuation (trailing P/E multiples often hover in the mid-30 times range). In our opinion, investors' interest should be piqued when the market is pricing in gloomy near-term demand.

 Infosys (INFY)
Moat: Narrow | Fair Value Uncertainty: Medium | 1-Month Return: -21%
From the  Premium Analyst Report:
Infosys Technologies, one of the most recognizable names in offshore information technology services, is best known for its operational excellence, innovation, and corporate-governance standards. The company's strength lies in its comprehensive services portfolio, mature and well-managed global delivery model, and long-standing client relationships.

 Novartis (NVS)
Moat: Wide | Fair Value Uncertainty: Low | 1-Month Return: -2%
From the  Premium Analyst Report:
In an industry plagued by stagnant growth, Novartis is a juggernaut with diversified operating platforms and an industry-leading number of new potential blockbuster drugs. Strong intellectual property supporting multi-billion-dollar products combined with an abundance of late pipeline products create a wide economic moat. While the 2012 patent loss on Diovan and manufacturing problems in the consumer division will weigh on near-term growth, the company's strong strategic position should lead to robust long-term growth.

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