10 Undervalued Wide Moat Stocks

Meta Platforms, Amazon, Walt Disney and Alphabet among undervalued companies in the Morningstar Wide Moat Focus Index

Susan Dziubinski 21 December, 2022 | 9:58AM
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Meta Platforms

The Morningstar Wide Moat Focus Index tracks companies that earn Morningstar Economic Moat Ratings of wide and whose stocks are trading at the lowest current market prices relative to our fair value estimates.

Wide-moat companies carry sound balance sheets and significant competitive advantages—two desirable qualities in the face of today’s economic uncertainty.

How has this collection of undervalued high-quality stocks performed this year? Pretty well: The Morningstar Wide Moat Focus Index outperformed the broad-based Morningstar US Market Index for the year to date by nearly 7 full percentage points as of December 16, 2022. The undervalued wide-moat stocks included in the index beat the broader market for the trailing three-, five- and 10-year periods, too.

With those performance numbers on the index’s side, its constituents are a fertile hunting ground for long-term investors looking for high-quality stocks trading at cheap prices.

10 Undervalued Wide-Moat Stocks to Consider

These were the 10 most undervalued wide-moat stocks in the Morningstar Wide Moat Focus Index as of December 16, 2022:

Meta Platforms (META)

Teradyne (TER)

Comcast (CMCSA)

Amazon.com (AMZN)

Walt Disney (DIS)

TransUnion (TRU)

Salesforce CRM

Alphabet (GOOG)

ServiceNow (NOW)

Equifax (EFX)

The most undervalued stock on the list, Meta Platforms, was trading 56% below our fair value estimate as of December 16, while the last on the list, Equifax stock, was trading 38% below our fair estimate. We think all 10 of these names are excellent high-quality stock ideas for long-term investors.

In an effort to keep the index focused on the least-expensive high-quality stocks, Morningstar reconstitutes the index regularly. The index consists of two subportfolios containing 40 stocks each, many of which are overlapping positions. The subportfolios are reconstituted semi-annually in alternating quarters on a “staggered” schedule.

Morningstar re-evaluates the index’s holdings and adds and removes stocks based on a preset methodology. Because stocks are equally weighted within each subportfolio, the reconstitution process also involves rightsizing positions.

After the most recent reconstitution, half of the portfolio added six stocks and eliminated six stocks.

6 Wide-Moat Stocks Added to the Index

These stocks were added to the Morningstar Wide Moat Focus Index on December 16:

Fortinet (FTNT)

International Flavors & Fragrances IFF

Monolithic Power Systems MPWR

Dominion Energy D

Tradeweb Markets TW

U.S. Bancorp USB

The new additions to the index hail from a hodgepodge of sectors: two technology stocks (Fortinet and Monolithic Power Systems), two financial-services stocks (Tradeweb Markets and U.S. Bancorp), one basic-materials stock (International Flavors & Fragrances), and one utilities stock (Dominion Energy).

6 Wide-Moat Stocks Removed From the Index

These stocks were removed from the Morningstar Wide Moat Focus Index on December 16:

BlackRock (BLK)

Charles Schwab (SCHW)

Gilead Sciences (GILD)

Guidewire Software (GWRE)

Honeywell (HON)

Intel (INTC)

Two reasons for removing stocks from the index are if we downgrade their economic moat ratings or if their price/fair value ratios rise significantly. Intel’s stock was removed from the index because we downgraded the company’s moat rating to narrow from wide. Nearly all of the other stocks removed during the latest reconstitution were pushed out by stocks that were trading at more attractive price/fair value ratios at the time of reconstitution. That being said, the stocks that were removed shouldn’t be considered stocks to sell. In fact, some of these stocks are still trading in what we’d consider a buying range. They’re just not as undervalued as the stocks added to the index at the time of the reconstitution.

What Are Wide Moat Stocks?

Morningstar thinks that companies with wide economic moats have significant advantages that allow them to successfully fend off competitors for decades. Companies can carve out their economic moats in a variety of different ways—by having high switching costs, through strong brand identities, or by possessing economies of scale, to name just a few. For a deeper dive into the concept of economic moats, read “What Makes a Moat?“ And to learn more about (or get a refresher on) Morningstar’s approach to buying stocks, visit “Morningstar’s Guide to Stock Investing.”

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.

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Susan Dziubinski  Susan Dziubinski is senior product manager with Morningstar.com.

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