3 Top Stocks for the Next 10 Years

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

Morningstar’s equity research team has added several companies to its coverage list over the summer. Today, we’re looking at three companies that are new to coverage that earn narrow economic moat ratings and whose stocks look undervalued to us today.

What is an economic moat rating? An economic moat rating measures a company’s competitive advantages. If Morningstar’s analysts award a company a narrow economic moat rating, that means we think the company can stave off competitors and outearn its cost of capital for at least the next 10 years.

But we don’t think investors should simply buy a stock because the company has carved out an economic moat. We also think valuation is important. Investors should hold off on buying companies with economic moats until their stocks are trading below what they’re worth—just like the three stocks we are talking about today are.

3 Top Stocks for the Next 10 Years

1. Interactive Brokers IBKR
2. Check Point Software Technologies CHKP
3. Brunswick BC

The first stock on our list is Interactive Brokers IBKR. This online brokerage generates revenue from trading commissions on a wide range of products, including equities, options, futures, bonds, and ETFs. It also generates net interest income and earns fees on ancillary services. About one third of its net revenue comes from the U.S. and the remainder from international markets. This midsize growth company earns a narrow economic moat rating thanks to its cost advantages; in fact, the firm has historically earned a much higher operating income margin, exceeding that of peers including Charles Schwab, TD Ameritrade, and E-Trade. The company generated strong net interest income during the latest quarter, but commissions were flat. We think shares are worth $112 apiece.

Next is Check Point Software Technologies CHKP. Check Point is a pure-play cybersecurity vendor that sells its software to enterprises, businesses, and consumers. This midsize growth company generates around half of its revenue from Europe, the Middle East, and Africa; another 40% from the Americas; and the remaining 10% from the Asia-Pacific region. Check Point has transformed itself from its roots as a firewall pioneer into an enterprisewide security provider. The company benefits from switching costs, which underpin our narrow economic moat rating. Second-quarter numbers were in line with guidance, and profitability improved nicely. We think the stock is worth $150.

And the last stock on today’s list is Brunswick BC. This small company is an established manufacturer of pleasure boats and engines, and some of its market-leading brands include Sea Ray and Mercury Marine. Brunswick also maintains a vertically integrated parts and accessories business. We think the company has consistently been able to command pricing power thanks to its portfolio of innovative products, and we therefore award the company a narrow economic moat rating. The firm has also done a good job with smart acquisitions as part of its long-term growth initiative. While we expect retail sales to moderate over the next few years as consumers reallocate spending to other categories postpandemic, we think Brunswick should take market share. We think shares are worth $118.

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Morningstar sector director Michael Wong and senior analysts Rob Hales and Jaime Katz contributed the research behind this segment.

Watch “2 of the Most Undervalued Stocks for the Long Term” for more from Susan Dziubinski.