The rally in U.S. equity markets over the past five-plus years has not only led to a tripling of the value of the S&P 500 TR Index, but has seen the market advance with relatively few corrections. This has been good for investors overall, but it has limited the options for our Ultimate Stock-Pickers, many of whom are now bereft of ideas in which to put new money to work.
Ultimate Stock-Pickers is a concept we’ve developed at Morningstar with one simple goal: to cross check our stock research against the opinions of professional money managers. While the stock analysts at Morningstar spend the majority of their time hunting for quality companies trading at attractive valuations, we would be remiss if we failed to acknowledge the fact that a whole host of individuals outside of Morningstar are engaged in the very same effort.
We still saw a fair number of high-conviction purchases during the most recent period, most of which were centred on companies with economic moats, as many of our managers continue to seek out higher-quality businesses trading at relative discounts to their fair value estimates in a market that in many of their minds has become fully valued. While the sheer number of purchases has dwindled as the market has moved higher over the last year and a half, we are still seeing some overlapping trades among our top managers.
Buying and selling activity has minor impact on our Ultimate Stock-Pickers' top 10 holdings. While narrow-moat rated Apple (AAPL) replaced wide-moat Wal-Mart (WMT), after it was sold outright by two of our managers, the mix of companies in the top 10 holdings remained relatively unchanged.
High-conviction buying focused on financial services stocks. The conviction buying that took place during the most recent period was primarily centred on Financials—like wide-moat rated Visa (V) and narrow-moat rated Citigroup (C) and Bank of America (BAC)—with the remaining top buys focused on a handful of different sectors of the market.
High-conviction selling continues to be driven more by valuation. In most cases and where commentary exists, managers were selling as share prices hit fair value estimates, and, in some cases, to eliminate stocks that were the target of acquisitions announced during the period. Both narrow-moat Abbott Labs (ABT) and wide-moat Stryker (SYK) stood out for falling short of manager expectations.
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