The 10 Cheapest Stocks in the Wide Moat Focus Index

In December, the Morningstar Wide Moat Focus Index swapped out 11 stock positions.

To be included in the Wide Moat Focus strategy, a company must have an economic moat rating of wide (we think they have advantages that will fend off competitors for at least 20 years), and their shares must be among those trading at the steepest discount to their fair value estimates in our coverage area. (Our fair value estimates are determined through independent research by the Morningstar Equity Research team.) Only U.S. stocks are included in the index.

The index consists of two subportfolios with 40 stocks, which are reconstituted semiannually, but with staggered rebalancing quarterly. After the December reconstitution, half of the portfolio swapped out 11 positions. The net result is that the index now holds 50 positions.

The following 11 stocks were added to the index:

On the flip side, 11 stocks were removed because their price/fair values rose or for other reasons.

The table below lists the 10 cheapest stocks in the index, ranked by price/fair value. The median stock in the Wide Moat Focus Index is trading at a price fair/value of 0.87. By comparison, our entire coverage area is trading at a median price/fair value ratio of 1.03--just a hair below the 52-week high of 1.04 reached in September.

Some Smaller Position Sizes Some readers have noticed that the index contains positions of varying sizes after reconstitution. (Previously, the entire index reconstituted quarterly and all positions were set back to equal weight.) Of course, market action can affect position sizes, but our reconstitution method also plays a big part. Because the two subportfolios hunt for attractively valued wide-moat stocks at different points in time, they do not overlap perfectly. Some stocks appear in both subportfolios, while others are present only in one.

In September, we added pharmaceutical company

LinkedIn was removed after the closure of

Peformance Attribution

Over the fourth quarter of 2016, the Wide Moat Focus Index returned 3.6%, trailing the S&P 500 by 19 basis points. Financial services was the biggest contributor to returns over the quarter, followed by consumer cyclicals. Among individual holdings, strong performances from

Among the detractors, exposure to the healthcare sector weighed the most, followed by technology. Among individual stocks,

Click

to see the top 25 positions in the index. (Premium members can see

.)

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