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Wide-Moat Values Still Available

The stock market runup has left U.S. equities as a whole fully valued, but some undervalued quality names remain.

The last few weeks have brought good news for most stock investors' portfolios. Relief over progress being made to stem the European debt crisis and the specter of another round of stimulus from the Federal Reserve has helped keep stocks on their impressive streak. The broad-based Morningstar U.S. Market index is up nearly 8.5% during the last 13 weeks.

Given this runup in prices and the continued macroeconomic uncertainty, it is natural to wonder if there are any opportunities left in the marketplace. Certainly the U.S. market as a whole isn't cheap anymore. The median/price to fair value of stocks rated by Morningstar stands at 0.95, essentially fairly valued. 

Unlike in the recent past, there isn't much of a valuation gap between companies that differ in terms of quality. Firms with sustainable competitive advantages (wide or narrow moats) are trading at the same slight discount to their fair value estimates that no-moat companies are. A similar story is true in sector-level valuations. There is relatively little spread from the most undervalued sectors (communication services) and the most overvalued (real estate).

But this doesn't mean opportunities are sparse for value investors to buy stocks with a reasonable margin of safety. Even in a fully valued market, there are still firms that are being mispriced and represent a good place to put cash to work. Many of these cheap stocks are great businesses that our analysts expect will be able to fend off competitors for years to come and have the ability to weather any unexpected storm. Given the continued question marks about the economic recovery, continued woes in Europe, and the potential for a slowdown in China, focusing on these wide-moat firms seems prudent. To find some of these gems, we used the Morningstar  Premium Stock Screener to uncover 4- and 5-star, wide-moat stocks with low or medium fair value uncertainty ratings. You can run the screen for yourself  here. Below are three investments that passed the screen.

 Vulcan Materials (VMC)     
| Fair-Value Uncertainty: Medium
From the  Premium Analyst Report:
Vulcan Materials is suffering from a disastrous downturn in construction activity and demand for aggregates. However, we think patience will reward the firm's shareholders once demand recovers on the back of a slowly improving U.S. economy. While its financial performance is hurting now, the firm should be well-positioned to benefit from the expected recovery, given its sustainable competitive advantages. We think Vulcan Materials has a wide economic moat, as the characteristics of aggregates markets and production methods lend themselves to more favorable pricing and operating flexibility for producers than is the case with most other commodities. Therefore, as volume recovers, in the long run we are optimistic that Vulcan can sustain price increases ahead of inflation, which should result in expanding margins and strong returns on invested capital.

 Applied Materials (AMAT)     
| Fair-Value Uncertainty: Medium
From the  Premium Analyst Report:
Applied Materials is the behemoth of the semiconductor equipment industry, with unmatched scale and a broad product portfolio. The firm has been steadily establishing its solar equipment business in an effort to drive growth. However, Applied's business tends to be fairly cyclical, and the firm is currently facing an uncertain demand environment.

 Microsoft (MSFT)  
| Fair-Value Uncertainty: Medium
From the  Premium Analyst Report:
Cloud computing is a double-edge sword for Microsoft. The impending move to web-based applications threatens to commodify the Windows PC operating system while opening up new revenue and profit opportunities in the deployment and delivery of cloud-based software services. Microsoft's server and business application software products are well positioned to ride the cloud computing wave even as the Windows PC OS franchise bears the brunt of the incoming tide.

Data as of Sept. 11. 

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