3 Expensive Wide-Moat Stocks to Avoid

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar.

Here at Morningstar, we talk a lot about economic moats. As a refresher: An economic moat represents a company’s competitive advantages. Morningstar assigns economic moat ratings to the companies our analysts cover. We give narrow economic moat ratings to companies we think can effectively fight off competition for at least a decade. Companies that we believe can outearn their competitors for 20 years or more earn wide economic moat ratings.

However, we don’t think that investors should buy the stocks of moaty companies at just any price. Instead, we think investors should always buy stocks when there’s a meaningful margin of safety. Put another way, we recommend that investors buy stocks when they’re undervalued. For us, that means buying stocks when they trade below our analysts’ fair value estimates.

So, today we’re looking at three wide-moat companies whose stocks are way overpriced relative to our fair value estimates. These high-quality companies may make great watchlist candidates, but we think they are stocks to avoid at today’s prices.

3 Expensive Wide-Moat Stocks to Avoid

1. Nvidia NVDA
2. McCormick MKC
3. Intuitive Surgical ISRG

The most overvalued wide-moat stock that our analysts cover today is Nvidia. Nvidia stock is up more than 200% in 2023, and the stock joined the trillion-dollar market-cap club earlier this year. Morningstar’s analyst notes that Nvidia may be the biggest winner in the rise of generative AI and ChatGPT so far, and we expect demand for Nvidia’s chips to be strong from the likes of many companies, including powerhouses Microsoft MSFT, Amazon AMZN, and Google GOOG. Nvidia reports second-quarter earnings later this month. We think the stock is worth $300 per share, and it’s trading well above that.

The second-most overvalued wide-moat stock under coverage is McCormick. McCormick is the leading global manufacturer and distributor of spices, herbs, extracts, and seasonings, with a customer base that includes not only end consumers but quick-service restaurants, retail grocery chains, and other packaged food and beverage manufacturers. Second-quarter numbers were solid, which was welcome news for a company that has been hurt by supply chain issues and increased competition. We think McCormick’s commitment to investing in innovation and marketing should allow it to maintain a competitive edge. That being said, we think shares are rich, trading well above our $63 fair value estimate.

The last most-overvalued wide-moat stock on our list is Intuitive Surgical. Intuitive Surgical develops, produces, and markets a robotic system for assisting minimally invasive surgery. Now, the ultimate ceiling for robotic surgery is virtually unlimited, with existing applications only scratching the surface of all possible procedures that could migrate to a robot. In the absence of any truly formidable competitors, Intuitive should continue to dominate the robotic surgery arena. And indeed, the company enjoyed robust procedure growth during the second quarter. Nevertheless, we think the stock is worth $230 per share, and it trades well above that.

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Morningstar directors Brian Colello, Erin Lash, and Alex Morozov provided the research behind this segment.