8 Wide-Moat Stocks of Tomorrow

In late April, the 2016 NFL draft will take place in Morningstar's home town of Chicago. Football enthusiasts who want to witness the draft in person can enter a lottery for tickets to the event. According to the Chicago Sun-Times, more than 79,000 fans from all 50 states applied to watch the draft in person last year. Devotees near and far want to see the next Peyton Manning or Jerry Rice.

Many investors would like to spot the "the next big thing," too. But just as team owners and scouts conduct extensive research on their top picks, investors need to do the legwork on their prospects, too. After all, you want to find stocks that can someday provide the endurance and competitive advantage of a Walter Payton, not a Johnny Manziel. In Morningstar parlance, that means uncovering the wide-moat stocks of tomorrow, today.

To generate a shortlist of potential wide-moat stocks of tomorrow, we screened Morningstar's database for narrow-moat companies with positive moat trends, or strengthening competitive advantages. We wanted to focus on those companies whose fair value estimates our analysts had the greatest confidence in, so we required our companies to carry low to medium uncertainty ratings. And finally, we narrowed our search further to stocks trading in 4- or 5-star territory. Eight companies made the cut.

Biotech, Biotech, and More Biotech

Five of the companies--

Of the five biotechs included here with narrow moats and positive moat trends, Alexion and BioMarin are the best values; both earn 5-star ratings as of this writing.

Alexion's narrow moat owes in part to the long-term commercial potential of drug Soliris (which treats rare genetic blood disorders). "The drug costs $400,000-$500,000 per year and is typically used chronically over the course of a patient's life," says analyst Stefan Quenneville in his latest report. "In clinical trials, patients on Soliris had the same life expectancy and quality of life as similarly matched healthy patients. This clear benefit to patients helps justify its high price and facilitates its reimbursement by payers, both public and private." Patents for Soliris extend until 2020 in European markets and 2021 in the United States, and the company is developing next-generation versions of the drug that may be able to lengthen the life of the franchise further, notes Quenneville. Alexion's portfolio and pipeline include other lucrative and difficult to manufacture biologics, too. "Alexion's specialized salesforce and strong entrenchment with patients and doctors should allow it to maintain its quasi-monopoly hold on these disease niches for the foreseeable future," concludes Quenneville.

Like Alexion, BioMarin's drug therapies can carry six-figure price tags. Between the costs of the treatments and the high barriers to entry, the company earns a narrow moat. "We think BioMarin's lucrative monopolies in several rare disease niches have provided it with enough competitive advantages to warrant a narrow moat," writes Andersen in her latest report on the company. Two already-profitable products (Aldurazyme and Naglazyme) and one recently approved product (Vimizim) to treat rare diseases have patent protection through at least 2020. Biomarin's moat extends beyond patents, adds Andersen; efficient scale is another source of moat for the company: "Enzymes to treat rare genetic diseases--including Aldurazyme, Naglazyme, and Vimizim--are quite difficult to manufacture reliably … This, coupled with the fact that BioMarin's drugs hover well below blockbuster status, could make them less profitable targets for generics firms, once the costs of manufacturing, clinical trials, and global marketing are tallied."

Other Wide-Moat Stocks in Waiting A trio of stocks from other industries round out our list.

Further Research:

The Morningstar Economic Moat Rating (video) The Morningstar Fair Value Estimate (video) The Morningstar Rating for Stocks (video) What Makes a Moat? (article) Why Moat Trends Matter (article) Morningstar Equity Research Methodology (PDF)

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