Wide-Moat Stocks On Sale: November 2022 Heat Map

Bodiam Castle in England

ValeryEgorov

Step One: Wide-moat stocks with 5-star and 4-star ratings

Historical evidence says that while quality alone is a poor indicator of outperformance, when combined with a decent valuation filter, Morningstar’s moat rating proves to be more than useful. Based on the available data, stocks with a wide-moat rating that also fit into the 4- or 5-star category deserve to be the subject of further analysis. See the detailed explanation and the underlying evidence of our first step in this article.

We focus on those companies that are covered by a Morningstar analyst as assigning a wide-moat rating without thorough analysis is a questionable practice in our opinion. As of November 3, there were 184 wide-moat stocks meeting our criteria, unchanged from last month.

Only 21.2% (39 stocks) of this wide-moat group earned a 5-star (most attractive) valuation rating. Here are they:

Company Name

ticker

Alphabet Inc A

GOOGLE

Cisco Systems

CSCO

Comcast Corp Class A

CMCSA

Compass Minerals International

CMP

Ecolab Inc.

ECL

Equifax Inc.

EFX

Etsy Inc

ETSY

Meta Platforms Inc.

GOAL

Guidewire Software Inc.

GWRE

International Flavors & Fragrances

IFF

Masco Corp

PLUS

Microsoft Corporation

MSFT

Polaris Inc.

PII

Teradyne Inc.

TER

The Estee Lauder Companies Inc.

THE

The Walt Disney Company

DIS

Tradeweb Markets Inc.

tw

TransUnion

TRU

Tyler Technologies Inc.

TYL

U.S. Bancorp

USB

Yum China Holdings Inc.

YUMC

Zimmer Biomet Holdings Inc.

ZBH

alibaba group holding ltd

SLIME

Anheuser-Busch InBev SA/NV

BUD

ASML Holding N.V.

ASML

Baidu Inc.

BIDU

Bayer AG

OTCPK:BAYRY

Experian PLC

OTCQX:EXPGY

Fanuc Corp

OTCPK:FANUY

GlaxoSmithKline PLC

GSK

Imperial Brands PLC

OTCQX:IMBBY

James Hardie Industries PLC

JHX

JD.com Inc

JD

Medtronic PLC

MDT

Roche Holding AG

OTCQX:RHHBY

Taiwan Semiconductor Manufacturing Co Ltd

SST

Tencent Holdings Ltd.

OTCPK:TCEHY

We believe that the percentage of 5-star-rated wide-moat stocks is a good indicator of market sentiment. When this percentage is high, even the best companies are on sale. When the percentage is extremely low, market conditions may warrant caution. (Please note that this is not an indicator for market timing!)

chart

Source: Data from Morningstar

As these best of breed companies may be worth a closer look even when they are just slightly cheaper than their fair value but are not in the bargain bin, we also list the 4-star-rated wide-moat stocks as of November 3:

Company Name

ticker

3MCo

HMM

Adobe Inc.

ADBE

Altria Group Inc.

MO

Amazon Inc.

AMZN

American Express Co.

AXP

Analog Devices Inc.

ADI

Ansys Inc.

ANSS

Applied Materials Inc.

AMAT

Autodesk Inc.

ADSK

Bank of America Corp.

bac

Bank of New York Mellon Corp.

BK

Berkshire Hathaway Inc B

BRK.B

Biogene Inc.

BIIB

Blackbaud Inc.

BLKB

BlackRock Inc.

BLK

Boeing Company

BA

Brown-Forman Corp Class B

BF.B

CH Robinson Worldwide Inc.

CHRW

Clorox Co.

CLX

CME Group Inc Class A

CME

Constellation Brands Inc A

STZ

Dominion Energy Inc.

D

Domino’s Pizza Inc.

ZPD

Emerson Electric Co.

EMR

Fortinet Inc.

FTNT

Honeywell International Inc.

HON

Intercontinental Exchange Inc.

ICE

Intuit Inc.

INTU

JPMorgan Chase & Co.

JPM

Kellogg’s

K

KLA Corp

KLAC

Lam Research Corp.

LRCX

Lowe’s Companies Inc.

LOW

MarketAxess Holdings Inc.

MKTX

Mastercard Inc A

MA

MercadoLibre Inc

MELI

Microchip Technology Inc.

MCHP

Monolithic Power Systems Inc.

MPWR

Moody’s Corporation

MCO

Nike Inc B

NKE

Northern Trust Corp.

NTRS

NVIDIA Corporation

NVDA

Palo Alto Networks Inc.

PANW

Philip Morris International Inc.

P.M

Rockwell Automation Inc.

ROK

Roper Technologies Inc.

ROP

S&P Global Inc.

SPGI

Salesforce Inc.

crms

ServiceNow Inc.

NOW

Starbucks Corp.

SBUX

State Street Corporation

STT

T. Rowe Price Group Inc.

TROW

Thermo Fischer Scientific Inc.

OMT

The Western Union Co.

W.U.

TransDigm Group Inc.

TDG

United Parcel Service Inc Class

UPS

Veeva Systems Inc Class A

VEEV

VeriSign Inc.

NRSV

Visa Inc Class A

v

Wells Fargo & Co.

WFC

West Pharmaceutical Services Inc.

WST

Workday Inc Class A

WDAY

John Wiley & Sons Inc Class A

WLY

Zoetis Inc Class A

ZTS

Amphenol Corp Class A

PHA

ABB Ltd

ABB

Airbus SE

OTCP:EADSY

Allegion PLC

ALLE

Ambev SA

ABEV

British American Tobacco PLC A

BTI

Core Laboratories N.V.

CLB

Dassault Systemes SE

OTCPK:DASTY

Nestlé SA

OTCPK:NSRGY

Novartis AG

NVS

Reckitt Benckiser Group PLC

OTCPK:RBGLY

Royal Bank of Canada

RY

Sanofi SA

SNY

The Toronto Dominion Bank

TD

Unilever PLC

UL

All in all, we have 116 firms that pass our very first criteria. (Down from 129 a month ago.)

chart

Source: Data from Morningstar

Step Two: Historical valuation in the EVA framework

We believe that the most widely used valuation multiples are terribly flawed. see this article on why we consider the Future Growth Reliance metric the best-of-breed sentiment indicator that addresses accounting distortions, thus gives us a true picture of which wide-moat companies seem attractively valued in historical terms. We want to buy our top-quality targets when the baked-in expectations are low, since that is when surprising on the upside has the highest probability. As investment is a game of probabilities, all we can do is stack the odds in our favor as much as possible.

55 of the 116 stocks survived this second step. Here’s the list:

Company Name

ticker

3MCo

HMM

Adobe Inc.

ADBE

Alphabet Inc A

GOOGLE

Amazon Inc.

AMZN

American Express Co.

AXP

Amphenol Corp Class A

PHA

Analog Devices Inc.

ADI

Anheuser-Busch InBev SA/NV

BUD

Ansys Inc.

ANSS

Applied Materials Inc.

AMAT

Autodesk Inc.

ADSK

Blackbaud Inc.

BLKB

BlackRock Inc.

BLK

CH Robinson Worldwide Inc.

CHRW

CME Group Inc Class A

CME

Comcast Corp Class A

CMCSA

Equifax Inc.

EFX

Experian PLC

OTCQX:EXPGY

Fanuc Corp

OTCPK:FANUY

Intercontinental Exchange Inc.

ICE

KLA Corp

KLAC

Lam Research Corp.

LRCX

Lowe’s Companies Inc.

LOW

MarketAxess Holdings Inc.

MKTX

Masco Corp

PLUS

Mastercard Inc A

MA

MercadoLibre Inc

MELI

Meta Platforms Inc.

GOAL

Microchip Technology Inc.

MCHP

Monolithic Power Systems Inc.

MPWR

Nestlé SA

OTCPK:NSRGY

Nike Inc B

NKE

Northern Trust Corp.

NTRS

Palo Alto Networks Inc.

PANW

Polaris Inc.

PII

T. Rowe Price Group Inc.

TROW

Reckitt Benckiser Group PLC

OTCPK:RBGLY

Roche Holding AG

OTCQX:RHHBY

Royal Bank of Canada

RY

Salesforce Inc.

crms

Sanofi SA

SNY

ServiceNow Inc.

NOW

Starbucks Corp.

SBUX

Taiwan Semiconductor Manufacturing Co Ltd

SST

Tencent Holdings Ltd.

OTCPK:TCEHY

Teradyne Inc.

TER

Thermo Fischer Scientific Inc.

OMT

The Toronto Dominion Bank

TD

United Parcel Service Inc Class

UPS

U.S. Bancorp

USB

VeriSign Inc.

NRSV

Visa Inc Class A

v

West Pharmaceutical Services Inc.

WST

The Western Union Co.

W.U.

Workday Inc Class A

WDAY

We are rather strict when it comes to historical valuation. There are stocks that unquestionably fail both or short- and long-term tests. There are some targets, however, that may look attractively valued if you only focus on the short-term (like the last 5 years), but the longer you zoom out, the more you lose your appetite. It comes down to personal preference where you draw the line. For us, only those stocks are allowed to appear on the heat map in our third step that seem attractively valued in both a short-term and long-term context. (We go back as far as 20 years, calculate averages and medians on different time frames and let our algorithm do the ruthless work.)

Step Three: The Heat Map of the most investable wide-moat stocks

Seeing the stocks of our shortlist on a heat map with a quality and valuation axis is something that can prove very useful when we need to make a decision on which candidates to analyze thoroughly. As explained in our previous article, we use the PRVit (Performance-Risk-Valuation investment technology) model of the EVA Dimensions team.

All in all, PRVit is a multifactor quantitative stock selection model based on EVA-centric measures of Performance, Risk, and Valuation. It first estimates the fundamental value of a company based on its risk-adjusted EVA performance (shown on the vertical axis) and then compares it to its actual valuation (shown on the horizontal axis). All factors in this model were chosen heuristically based on common sense, and not by data mining, yet strong and statistically significant backtests prove the soundness of the PRVit approach both in the US and globally. (See details here.)

Here is the heat map as of November 3:

heat map

Source: Institutional Shareholder Services Inc.

We also present the results in a table format to make your decision easier.

table

Source: Institutional Shareholder Services Inc., Morningstar

(Stocks highlighted in light blue are Morningstar’s 5-star-rated wide-moat names that survived the second step of our process.)

In PRVit, the factors are grouped into three categories: Performance, Risk, and Valuation. Each company has a composite 0-100 score in each category, where higher is better for Performance and lower is better for Risk and Valuation. We believe that stocks in the upper quintile of the PRVit ranking (with a PRVit score above 80) are worth a closer look.

We plan to run this three-step process on a monthly basis and publish the shortlist of targets it produces.

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