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The 10 Best-Performing Undervalued Moat Stocks

Interactive Brokers and Verizon are among the recent top undervalued stocks with long-term competitive advantages.

Moat related artwork

It’s been a mixed picture for stocks with a strong competitive edge. Those with the most durable advantages—known as wide-moat stocks—have outperformed the overall market. But those with competitive advantages that aren’t quite as strong—narrow-moat stocks—have underperformed.

Adding various firms’ price/fair value ratios to their long-term growth expectations makes for an attractive list of companies that have a long track record of outperformance but also are undervalued. We screened for 4- and 5-star-rated stocks with moats, then identified the top performers based on their total year-to-date returns. Here are the top 10 undervalued, overperforming moat stocks.

What Are Economic Moats?

A Morningstar Economic Moat Rating assesses a company’s ability to fend off competition based on its competitive advantage and potential for high long-term returns. Narrow-moat companies are predicted to keep competition at bay for 10 years, while those with wide moats are expected to have a market advantage for more than 20 years.

The Morningstar Wide Moat Composite Index and Morningstar Narrow Moat Index track companies with moats. One thing these ratings don’t consider is valuation. Morningstar analysts encourage investors to look at both moats and valuations to get the best long-term returns. Historical data backs this up.

Morningstar US Moat Indexes

Data as of Source: Morningstar Direct, Morningstar Indexes.

How Have Moat Stocks Performed?

Currently, the wide-moat index outperforms the market by 11.82%, while the narrow-moat index is under it by 9.19%. The wide-moat stocks’ returns were led by the technology sector, with chipmaker superstar Nvidia NVDA leading and Meta Platforms META and Palo Alto Networks PANW following. The narrow-moat index also gained tailwinds from tech stocks. Crowdstrike Holdings CRWD, Uber Technologies UBER, and Advanced Micro Devices AMD were the top performers in the group.

Which Top-Performing Moat Stocks Are Undervalued?

At the top of the list is Interactive Brokers, an online brokerage that generates trading commissions from facilitating trading in a wide range of products. “Interactive Brokers had a record year in terms of both top-line and bottom-line results,” writes Michael Wong, director of equity research at Morningstar. “2023 net revenue increased 42% to $4.34 billion compared with 2022, mostly driven by a 68% increase in net interest income.”

Top 5 Undervalued Moat Stocks

Data as of Source: Morningstar Direct, Morningstar Indexes.

Other names in the top ten include DoorDash (which Morningstar analysts expect will remain a market leader in delivery apps) and Tapestry, the luxury goods parent company of Coach New York, Kate Spade, and Stuart Weitzman. “With the strengthening of its network effect, we expect DoorDash to maintain its leadership position in a market where there will likely be only one other viable player, Uber Eats, in the long run,” writes senior equity analyst Ali Mogharabi. “The firm’s network effect should also lower consumer and deliverer acquisition costs, resulting in further operating leverage and GAAP profitability in 2023.”

Top 10 Undervalued Moat Stocks

Table displaying the top ten performing and undervalued moat stocks.

Here’s a close look at what Morningstar analysts have to say about these stocks.

Interactive Brokers Group

“Interactive Brokers is a unique brokerage within our coverage. The firm serves a more niche client base. Apart from retail investors, the company also caters to the trading of institutional clients like hedge and mutual funds, proprietary trading groups, introducing brokers, and financial advisors. The commission mix between retail and institutional clients is about 55%/45%. Most of Interactive Brokers’ clients still choose to pay commissions when many other retail brokerages switched to a zero-commission model for U.S. stock trading. The clients of Interactive Brokers are more sophisticated compared with the clients of Charles Schwab, TD Ameritrade, and E-Trade. To be more specific, they trade more frequently, maintain higher cash balances to make opportunistic moves, and use leverage. These trading-savvy customers are attracted by Interactive Brokers’ low margin rates, comprehensive trading platform, sophisticated trading execution capabilities, and high interest paid on idle cash.

“Interactive Brokers’ approach requires strength in its routing system. The fact that hedge funds, proprietary trading groups, and introducing brokers choose its trading platform is a demonstration of its capabilities. The trading execution technology build-up and maintenance requires huge investment, which a lot of small introducing brokers do not want to deal with.”

Read more of Michael Wong’s analyst notes here.

Verizon Communications

“Verizon delivered on nearly all fronts during the fourth quarter. Free cash flow hit $18.7 billion for the year, up more than 30% versus 2022 and well ahead of management expectations. The firm added 449,000 net postpaid phone customers in the quarter, its best performance in two years. Management warned that customer growth may moderate following another round of price increases on older rate plans that will take effect in March. However, it still expects to add both consumer and business phone customers during the year, which we believe reflects solid pricing discipline while messaging that it won’t allow rivals to pick off accounts with unduly aggressive promotions. We remain encouraged by the competitive balance in the wireless industry, and we are maintaining our $54 Verizon fair value estimate.

“The pace of growth in average revenue per consumer postpaid wireless account accelerated modestly versus the prior quarter thanks to past rate increases, the adoption of fixed-wireless broadband, and the migration to higher-end rate plans. The combination of strong customer growth and revenue strength likely provided the confidence to push another price increase through. Wireless revenue increased 0.6% versus a year ago as low-margin phone sales continue to decline on weak upgrade demand. The prepaid business also remains a sore spot for Verizon—289,000 net customer losses during the quarter—though this business only accounts for a bit more than 10% of wireless service revenue.”

Read more of Michael Hodel’s analyst notes here.

ResMed

“We maintain our USD 258 fair value estimate for narrow-moat ResMed, or AUD 39 per CDI at current exchange rates, following second-quarter fiscal 2024 results. Despite significant market pessimism given the growing prevalence of GLP-1 drugs for weight loss, underlying EBIT grew 15% to USD 366 million sequentially on first-quarter fiscal 2024, with sales up 5% and the underlying EBIT margin expanding roughly 250 basis points to 31%. Our long-term estimates are broadly unchanged, but we increase our fiscal 2024 underlying EBIT forecast by 2% to USD 1.4 billion. This was largely due to expenses tracking slightly below our expectations, as well as strong performances in ResMed’s software-as-a-service business and device sales outside the Americas, up 16% in constant currency on the previous corresponding period.

“Shares remain materially undervalued. Improving patient flow and availability of devices continue to support strong sales. We also anticipate margin expansion as ResMed’s sales mix shifts to higher-margin masks, and cost inefficiencies of simultaneously ceasing production of its older AirSense 10 devices. Our midcycle 34% EBIT margin forecast is unchanged. The second-quarter gross margin expanded 90 basis points sequentially to 57% versus the first quarter, driven by product price increases and reduced freight costs. In addition, selling, general, and administrative expenses and research and development expenses decreased to 19.1% and 6.4% of revenue in the second quarter versus 20.2% and 6.9% in the first quarter, respectively. This is largely a result of the firm reducing its global workforce by 5% in October 2023, largely in noncore SG&A activities, and instead planning to invest more in product innovation and increasing brand awareness. We think this a sound strategy to help further penetrate the market.”

Read more of Shane Ponraj’s analyst notes here.

Tapestry

“We believe Coach (74.5% of fiscal 2023 revenue) has the brand strength and pricing power to provide a narrow moat for Tapestry. The firm has turned Coach around through store closures, restrictions on discounting, and increased e-commerce, the last of which took off during the pandemic. The brand is a leader in the attractive handbag category and consistently generates gross margins above 70%. Further, we expect growth in complementary categories like footwear and fashion. We anticipate China to be a key growth region for Coach, as according to Bain, Chinese consumers will make up 38%-40% of worldwide luxury goods spending in 2030, up from 33% in 2019. We forecast Coach’s Greater China sales to reach $1.3 billion in fiscal 2033 (20% of sales), up from $897 million in fiscal 2023 (18% of sales).

“We do not think Kate Spade (21% of sales) or Stuart Weitzman (4% of sales) contribute to Tapestry’s moat. Both brands have struggled to generate consistent sales growth, and their profitability is well below that of Coach.”

Read more of David Swartz’s analyst notes here.

RTX

“RTX announced final 2023 results that came in a touch higher than our year-end expectations and slightly reined in its expectations for 2024 and 2025 revenue and margin growth. The firm seems to have contained the financial fallout from its metallurgy-related engine recalls, and we think medium-term cash flow variability from such charges seems unlikely.

“We still see RTX’s Collins Aerospace unit as the somewhat unsung backbone of the company’s portfolio. We think it’s well-positioned for secular growth in commercial aerospace manufacturing. Collins’ revenue grew 14% last year as aerospace production continued to rebound and contributed half of normalized segment operating profits in 2023, and we see a similar portion of the company’s profit coming from Collins over our forecast period.”

Read more of Nicolas Owens’ analyst notes here.

Berkshire Hathaway

“We continue to believe that Berkshire, owing to its diversification and its lower overall risk profile, offers one of the better risk-adjusted return profiles in the financial services sector (and remains a generally solid candidate for downside protection during market selloffs). We remain impressed by Berkshire’s ability in most years to generate high-single- to double-digit growth in book value per share, comfortably above our estimate of its cost of capital. We also believe it will take some time before the firm finally succumbs to the impediments created by the sheer size and scale of its operations, and that the ultimate departure of Warren Buffett and Charles Munger will have less of an impact on future operating results than many investors believe. We view Berkshire’s decentralized business model, broad business diversification, high cash-generation capabilities, and unmatched balance sheet strength as true differentiators for the firm.

“While these advantages have been overshadowed during much of the past decade by the company’s ever-expanding cash balances—which earned next to nothing in a near-zero short-term interest rate environment—we believe the company has finally hit a nexus where it is focused on reducing its cash hoard through a mixture of stock investments and share repurchases. Over the past 12 calendar quarters, the company has repurchased close to $60 billion worth of its common stock, equivalent to $4.9 billion per quarter on average, which has eliminated just over 10% of the company’s total shares outstanding. The company has also pursued higher dividend-yielding securities when purchasing equity securities and is benefiting from higher short-term rates on its cash balances. With the firm closing out June 2023 with an estimated $107 billion in dry powder and valuations not quite where they need to be for many of the types of quality assets Buffett would prefer to acquire outright, we expect the bulk of the company’s excess capital allocation to be focused on stock and bond investments and share repurchases.”

Read more of Greggory Warren’s analyst notes here.

DoorDash

“DoorDash holds the number one position as an online food order aggregator in the U.S., ahead of Uber Technologies’ Uber Eats and Grubhub. The firm is at the early stages in trying to attract a larger piece of what we estimate could be $1 trillion worth of goods and services by 2025 to its platform. DoorDash benefits from the network effects between merchants, deliverers (or “dashers”), and consumers, plus intangible assets, in the form of data, which we believe together warrant our narrow moat rating.

“Consumers use DoorDash’s app to order food for pickup or delivery from restaurants. Based on data from Second Measure, DoorDash currently is the market leader in the U.S., with 56% share, above Uber’s 26% and Grubhub’s 18%. The firm has over 450,000 merchants, more than 20 million consumers, and more than 1 million dashers on its platform. We view the primary market DoorDash is targeting aggressively, consumer spending on food and beverages away from home, as attractive and expect it to grow 4%-5% annually during the next five years. DoorDash has also begun to provide similar service to businesses in verticals other than restaurants, such as grocery, retail, pet supplies, and flowers.”

Read more of Ali Mogharabi’s analyst notes here.

LPL Financial

“LPL Financial had a strong 2023, with recovering equity markets and high interest rates boosting earnings, and 2024 should see continued growth in revenue and earnings. The company reported net income of $1.07 billion, or $13.69 per diluted share, on $4 billion of gross profit in 2023. Gross profit increased 26% from the previous year with about 70% of the increase from client cash-related revenue, as high interest rates benefited the company, and the remainder was driven by high client asset levels. We don’t anticipate making a material change to our $289 fair value estimate for narrow-moat-rated LPL Financial. We assess the shares as modestly undervalued.

“Despite some offsetting factors, we currently believe client cash-related revenue will grow in 2024. The two positive drivers of cash revenue should be higher client cash balances and the repricing of some of the company’s fixed-rate insured cash account balances. Insured cash sweep balances increased to $43.8 billion in the fourth quarter. This is the first sequential increase since a peak of $60.3 billion in the third quarter of 2022. Across the investment-services industry, all firms to our knowledge have reported a lessening of cash sorting by clients, in which they move their cash to higher-yielding products. Firms have noted that there can be a seasonal increase in client cash in the fourth quarter from portfolio rebalancing, but overall, there are positive signs that sweep client cash balances could soon resume an upward trend. The company has $6.5 billion of insured cash account balances with a yield of 2.5% maturing in 2024. Recent reinvestment rates have been over 4%, so this could lead to around a $100 million increase in gross profit. Offsetting these positive drivers of client cash-related revenue is a lower-interest-rate environment. The company estimates that for each 0.25-percentage-point decline in the federal-funds rate, revenue would decrease about $35 million.”

Read more of Michael Wong’s analyst notes here.

Corteva

“Corteva’s fourth-quarter results and management’s outlook for 2024 and 2025 were in line with our near- and long-term outlook for the company. Our thesis had been that the inventory destocking in crop protection would prove temporary and Corteva’s differentiated portfolio, which underpins our wide moat rating, would drive long-term growth through improved pricing and profit margin expansion.

“To close the year, the crop protection business saw sales fall just 5%, a much-improved result versus the 9% full-year decline. In our view, the slowing decline signals inventory destocking has largely been completed in many of Corteva’s markets, including North America, which generated 50% of sales in 2023. In 2024, we expect Corteva will see moderate profit growth from lower net royalties in the seeds business and a rebound in crop protection following the 2023 decline. Longer-term, net royalties should continue to decline in seeds. Crop protection should see strong profit growth from a return to normal demand and the rapidly increasing demand for biologicals, where Corteva is the market leader, that farmers use to fight resistant pests.”

Read more of Seth Goldstein’s analyst notes here.

Liberty Global

Read more about Liberty Global here.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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