Map sale

Large Moat Stocks On Sale – The April 2022 Heatmap

Valery Egorov/iStock Editorial via Getty Images

Step One: Wide Moat Stocks with 5-Star and 4-Star Ratings

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

We focus on companies covered by a Morningstar analyst because assigning a large margin without in-depth analysis is a questionable practice in our view. As of March 25, 183 wide-moat stocks met our criteria, unchanged from last month, as Check Point Software Technologies (CHKP) was included, while IHS Markit was excluded due to the company’s acquisition by S&P Global (SPGI).

Only 6.0% (11 stocks) of this wide-moat group achieved a 5-star valuation rating (the most attractive). Here they are :

Company Name

Teleprinter

Equifax Inc.

EFX

Meta Platforms Inc

Facebook

Polaris Inc.

IPI

Salesforce.com Inc.

RCMP

Yum China Holdings Inc.

YUMC

Anheuser-Busch InBev SA/NV

BUD

Imperial Marks PLC

OTCQX:IMBBY

JD.com Inc.

J.D.

Taiwan Semiconductor Manufacturing Co Ltd

TSM

Tencent Holdings Ltd.

OTCPK: TCEHY

Unilever APIs

UL

We believe that the percentage of wide moat stocks rated 5 stars 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 a market timing indicator!)

Table

Source: Morningstar data

As these best-of-breed companies may be worth a closer look, even when they are only marginally cheaper than fair value but not in the trash, we also list rated broad-moat stocks 4 stars as of March 25:

Company Name

Teleprinter

3M Co

MMM

Adobe Inc.

ADBE

Alphabet Inc A

GOOGL

Amazon.com Inc.

AMZN

Biogene Inc

IBIB

Blackbaud Inc

BLKB

BlackRock Inc.

BLACK

Boeing Company

BA

Brown-Forman Corp Class B

BF.B

Campbell Soup Co

pcb

Clorox Co.

CLX

Comcast Corp Class A

CMCSA

Compass Minerals International

CPM

Constellation Brands Inc A

ZST

Ecolab Inc.

ECL

Emerson Electric Co.

EMR

Etsy Inc.

ETSY

Gilead Sciences Inc.

BROWN

Guidewire Software Inc.

GWRE

Honeywell International Inc.

HON

Intel Corporation

INTC

International flavors and fragrances

IFF

Kellogg Co.

K

Lam Research Corp.

LRCX

Masco Corp.

SAM

MercadoLibre Inc

MELI

Merck & Co Inc.

M.K.R.

Microsoft Corp.

MSFT

Moody’s Corporation

MCO

Philip Morris International Inc.

PM

ServiceNow Inc

NOW

Starbucks Corp.

SBUX

T. Rowe Price Group Inc.

TRUE

Teradyne Inc.

TER

The Walt Disney Co.

SAY

The Western Union Company

Wu

Trans Union

TRU

Tyler Technologies Inc.

TYL

Veeva Systems Inc Class A

VEEV

Wells Fargo & Co.

WFC

Zimmer Biomet Holdings Inc.

ZBH

Airbus SE

OTCPK: EADSY

Alibaba Group Holding Ltd

BABA

PLC Allegation

GO

Ambev S.A.

ABEV

ASML Holding SA

ASML

Baidu Inc.

BIDU

Bayer AG

OTCPK:BAYRY

British American Tobacco PLC A

PSTN

Core Laboratories SA

BEC

Fanuc Corp.

OTCPK: FANUY

GlaxoSmithKline PLC

GSK

Julius Baer Group AG

OTCPK:JBAXY

Medtronic APIs

MTD

Reckitt Benckiser PLC Group

OTCPK: RBGLY

Roche Holding AG

OTCQX: RHHBY

Sanofi SA

SNY

In total, we have 68 companies that meet our very first criteria. (Down from 76 a month ago.)

Table

Source: Morningstar data

Second stage: historical evaluation within the framework of the EVA

We believe that the most widely used valuation multiples are woefully flawed. See this article on why we consider the future growth dependency measure to be the best sentiment indicator which deals with accounting distortions, thus gives us a true picture of wide-moat companies that seem attractively valued in historical terms. We want to buy our top quality targets when predefined expectations are low, since that is when the upside surprise has the highest probability. As investing is a game of odds, all we can do is stack the odds in our favor as much as possible.

32 of the 68 stocks survived this second stage. Here is the list :

We’re pretty strict when it comes to historical valuation. There are stocks that unquestionably fail the short-term and long-term tests. However, some targets may look attractive if you only focus on the short term (like the last 5 years), but the further you zoom out, the more your appetite loses. It depends on personal preference where you draw the line. For us, only stocks are allowed to appear on our stage three heatmap that look attractively priced in both a short-term and long-term context. (We go back 20 years, calculate averages and medians over different time periods, and let our algorithm do the ruthless work.)

Step Three: The Heatmap of the Most Investable Wide-Mouth Stocks

Seeing our shortlisted stocks on a heatmap with a quality and rating axis is something that can come in very handy when we have to make a decision on which candidates to analyze in depth. As explained in our previous article, we use the PRVit model (Performance-Risk-Valuation Investment Technology) from the EVA Dimensions team.

Overall, PRVit is a multi-factor quantitative stock selection model based on EVA-centric performance, risk and valuation metrics. It first estimates a company’s fundamental value based on its risk-adjusted EVA performance (shown on the vertical axis), then compares it to its actual valuation (shown on the horizontal axis). All of the factors in this model were chosen heuristically based on common sense, not data mining, but strong, statistically significant backtests prove the robustness of the PRVit approach in the US and globally. world. (See details here.)

Here is the heat map as of March 25:

heat map

Source: Institutional Shareholder Services Inc.

We also present the results in tabular form to make your decision easier.

Table

Source: Institutional Shareholder Services Inc., Morningstar

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

In PRVit, the factors are grouped into three categories: performance, risk and evaluation. Each company has a composite score from 0 to 100 in each category, where higher is better for performance and lower is better for risk and valuation. We think stocks in the top quintile of the PRVit ranking (with a PRVit score above 80) are worth taking a closer look.

We plan to run this three-step process on a monthly basis and publish the shortlist of targets it produces. If you don’t want to miss any of these pieces, scroll up and click “Follow”.