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5 Wide Moat Stocks that Failed to Deliver in 2014

These five stocks should have delivered for investors over the past 12 months - but they flopped. We examine why they disappointed and whether they will come good in 2015

Jason Stipp 31 December, 2014 | 10:44AM


Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five. 2014 was a good year for stocks including wide moat stocks, but not all wide moat stocks came along for the ride. Here with five wide moat stocks that were left behind is Morningstar markets editor Jeremy Glaser. Jeremy, thanks for being here.

Jeremy Glaser: Thanks Jason, Happy New Year.

Stipp: Happy New Year to you too. One of the wide moat names that didn’t make it with the winners in 2014 was ExxonMobil (XOM), it got caught in the oil downturn.

Glaser: One of the biggest stories in the back half of the year was the decline in oil prices and how quickly the price of crude declined and ExxonMobil got hit by this as you'd expect. But they are hit a little bit less hard than the energy sector as a whole and the oil sector as a whole. I think this really speaks to the power of its business and the power of having a wide economic moat. Because Exxon is a little bit more diversified, because they have the resources to be able to kind of wait out any period of lower oil prices. They are not going to be kind of (buffet) in the wind if this turns out to be a relatively short lived decline in prices.

They were able to look a little bit better and their stock performance is able to look a little bit better. And generally speaking this is what you'd hope out of a wide moat business that it's going to have the kind of have, that if you are going to see some short term factors they are not going to get into trouble. They are going to be able to withstand it and over the long term will be able to keep making economic profit. We think ExxonMobil is still very much in that category of wide moat businesses they'll be able to make lots of profits for shareholders over time even if we see some dislocations temporarily in the price of oil.

Stipp: Wide moat Amazon (AMZN) had a tough year. It was off more than 20%. You hear lot about Amazon's growth and growth potential. So how do you explain this underperformance?

Glaser: Yeah, Amazon did not have a great year in the stock market, although I should say this comes after a couple of years of some very good performance, this is just kind of backing off a little bit. But really this was another year where investors were questioning when Amazon is really going to start turning to profit instead of just being focused on growth.

And on the growth front things looked pretty good. They kept adding users, they kept building other network effect and they were growing faster than the e-commerce market as a whole showing that they are gaining share, they are doing even better.

But the concern is are they going to be able to grow profitably and are they going to be able to reinvest that in projects that are going to pan out.

We saw the Fire Phone this year which just was a complete flop. They had to take a big write off on that and that’s something that that hurt profitability for 2014. And those kind of capital allocation missteps really made investors pause a little bit about what the future of this business is. But R.J. Hottovy our analyst who covers Amazon thinks that over the long term Amazon is going to be able to be profitable. That they are really laying the ground work for that right now. That if investors can be little bit patient they are going to be rewarded.

Stipp: And wide moat firm Swatch (UHR) also had a tough year.

Glaser: Swatch has been under a lot of pressure this year. I think it could be summed up by the Apple Watch effect as what's really causing this. There were just some concerns that as Apple introduced its watch that there was going to be a big consumer shift away from traditional watches and more towards smart watches. But Paul Swinand our Swatch analyst thinks that some of these fears are really unfounded. That Apple (AAPL) may have a successful product, but there are still going to be a large group of people who want to make the fashion statement, who want to make the personal statement of having a luxury Swiss watch. And Swatch not only has a Swatch brand but has other high end brands as well.

Also to remember that Swatch is a vertically integrated company that really does possess some great competitive advantages, which gives them and puts them in a good position to compete against the rise of the smart watches to really make the kind of branding efforts and to use their intangible assets to convince consumers that it's still worth having a real watch versus a smart watch. We'll have to see exactly how this plays out, but given that the shares do look fairly cheap right now investors could be paid if it turns out that consumer preferences don’t shift so rapidly.

Stipp: Over in financials American Express (AXP) was up this year, but not as much as the sector.

Glaser: American Express shares up around 4% this year which is really quite a bit below the over 15% increase seen by the S&P 500 financial slate. And I think what's happening here is not that investors really all of a sudden are questioning the moat of American Express or are questioning the strength of the business. They continue to have a good year. They are making some investments, say in prepaid debit cards which may be raised a few questions. There is always concerns about is there going to be some big disruptive payment technology, which of course has weighed over the stock for quite some time. But really we didn’t see any big material changes to what the American Express business looks like.

I think the underperformance really could come down more to valuation. The shares still look pretty over valued could just be that expectations were too high or baking in unrealistic type of scenario and they are starting to come back down to earth a little bit. But still aren’t there we still think that shares are in about two star range. So I think this is a good example of a company that’s still a good business. I mean you see some underperformance so you might think, good business, underperformance this must be a buying opportunity. That’s not always the case, could be coming off of a very expensive state and its important always to look at what the valuation looks like today.

Stipp: Last week we talked about all the strength in healthcare in 2014, but not every healthcare stock did well including wide moat Sanofi (SAN).

Glaser: Healthcare stocks looked very strong in 2014 driven partially by an M&A boom. But Sanofi looked a little weaker and there are few things happening here. One were fundamental concerns about the business. Things like what's going to happen with their insulin drugs when it comes off patent. Is there going to be more competition? Is their pipeline going to be able to produce?

Those are somewhat understandable. But there are also some concerns about stewardship where we saw the Board oust the CEO in a very much a surprise move and basically said that he wasn’t working well with them. He wasn’t communicating well and they just didn’t think that it was kind of good fit. And their shares sold-off pretty strongly on this news. I think it just shows how important stewardship can be and how you need to keep stewardship in mind. The fundamentals of the business, the strength of their competitive advantages; that's clearly the most important thing.

But you need to make sure that that stewardship structure is there to make sure that your interests are going to be looked out for as minority shareholder and that you are going to be rewarded for that. Over time you are going to be able to actually reap those cash flows.

I think we saw in Sanofi the stewardship hiccup, investors weren’t happy about that. I think it just highlights the importance of making sure that that’s there instead of just looking at only the fundamentals.

Stipp: Another great week and another great year of insights for the Friday Five, Jeremy thanks for joining me.

Glaser: Thanks Jason.

Stipp: For Morningstar I'm Jason Stipp. Thanks for watching.

This video was produced by Morningstar.com but contains stocks available to UK investors

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Amazon.com Inc1,754.79 USD0.13
American Express Co120.13 USD0.39
Apple Inc266.38 USD-0.27
Exxon Mobil Corp68.01 USD-0.74
Sanofi SA83.11 EUR-1.54
The Swatch Group AG Bearer Shares276.20 CHF0.77

About Author

Jason Stipp  is Editor of Morningstar.com, the sister site of Morningstar.co.uk.

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