8 high quality stocks, cheap in price

Widespread stock market losses in 2022 have opened up opportunities for investors to acquire shares of high-quality companies at discounted prices.

Stocks deserving of Morningstar’s wide moat designation — companies with strong competitive advantages that should help them outperform their peers over the next 20+ years — have fared less well this year than the broader market.

As a group, wide moat companies lost 14.1% for the year, nearly 1% more than the Morningstar US Market Index’s losses of 13.3%. The underperforming wide-moat group of stocks includes Biogen (BIIB), down 19% year-to-date, and cloud-based CMS provider Salesforce (CRM), where the stock is down by 24%. Both are now trading in undervalued territory and are considered five-star stocks by Morningstar analysts.

It’s particularly notable that wide-gap stocks are lagging in the current economic environment of high inflation and rising interest rates, where companies with the strongest competitive advantages should be able to shine.

But many wide-moth stocks were also particularly overvalued heading into 2022, and expensive names have been at the epicenter of market declines so far this year. Now, however, the price of many wide-moat stocks has fallen enough to be undervalued by Morningstar analysts’ fair value estimates.

Piece 1

We’ve sifted through the Morningstar Wide Moat Focus Index to find wide moat companies with Morningstar’s 5-star rating that are currently trading at discounted prices. Here are the eight most undervalued names in the index:

Piece 2

Meta (FB)

“Meta’s large and growing user base and the rich data it generates helps advertisers deliver more effective ads, in terms of brand awareness, which translates into a high return on investment. With a higher ROI, more advertisers join, allowing Meta to further monetize the network. The company’s large audiences and continued consumer engagement will likely continue to drive demand for Meta ad inventory, albeit possibly at lower prices. »

–Ali Mogharabi, Principal Analyst

Biogenic (BIIB)

“Biogen has achieved strong profitability based on its collaboration with Roche in oncology and Biogen’s diversified MS franchise, and has the intangible assets to support a broad fluke. We believe the company faces environmental, social and governance risks, particularly related to potential US drug pricing policy reform (Biogen makes approximately 60% of its sales in the US market) and an ongoing potential for product governance issues (including litigation) . Although we have considered these threats in our analysis, we do not consider them material to our assessment or rating.

–Karen Andersen, Strategist

Polaris (PII)

“We believe Polaris has established a broad economic moat, delivering healthy adjusted returns on invested capital (averaging 21%, including goodwill, over the past five years). We believe the innovative product offerings and growth of adjacent categories through acquisitions (and organically) have positioned the company to continue to capture growing volume and profits as it reaches new users. final. However, non-existent switching costs could weigh on pricing power intermittently. In our opinion, Polaris has taken the right steps to protect its broad fluke rating, with disciplined quality assurance protocols and well-developed manufacturing processes to avoid ubiquitous product recalls.

Jaime M. Katzsenior analyst

Salesforce (CRM)

“For Salesforce.com as a whole, we attribute a lot of headroom primarily resulting from switching costs, with support from a network effect as well. Salesforce.com remains the undisputed leader in sales force automation (Sales Cloud). The company has grown from no product to 33% market share over the past 20 years. Customers and industry observers consider Salesforce.com the undisputed leader in a category that increases sales rep productivity. In other words, it is essential software that helps generate revenue for the users. We believe customers are also reluctant to abandon Sales Cloud due to the time, expense, and risk of implementing new applications and migrating data, as well as the time, expense, and loss of productivity related to the retraining of the workforce on a new platform. The SFA is a revenue-generating initiative and is therefore essential for users. The organizational risk of making a change is high, in our opinion.

–Dan Romanoff, Principal Analyst

Veeva Systems (VEEV)

“We attribute a lot of leeway to Veeva, due to switching costs and, to a lesser extent, intangibles. The company provides critical software for the life science industry. The high degree of specification behind Veeva’s software is a boon to its customers (in improved workflow and ease of regulatory compliance) and to Veeva itself (customers have their complex workflow built into its software). Once integrated into a company’s operational activities, the direct time and expense of moving to a competing software solution is high and comes with substantial operational risks. The operational risk of a failover is significant and could result in loss of data in the migration process, temporary disruption of sales activities, or even ultimately delaying product launches and exposing the business to unnecessary regulatory risk.

–Dylan Finley, Analyst

Guidewire Software (GWRE)

“Our wide moat for Guidewire Software is due to higher customer switching costs and, to a lesser extent, intangibles. Our position is that software switching costs depend on several factors. The most obvious would be the direct time and expense of implementing a new software platform, plus there are indirect costs along the same lines, primarily lost productivity as employees move up the learning curve of the new system and the distraction of employees involved in the function where the change is occurring.Perhaps most importantly, there is operational risk, including loss of data during switchover, project execution, and disruption The more critical the function and the more touchpoints there are in an organization, the more touchpoints a software vendor has, the higher the change costs. will be high. »

–Dan Romanoff, Principal Analyst

Equifax (EFX)

“Overall, we think Equifax deserves a broad moat rating based on intangibles.

“Equifax’s data is essential for the underwriting decisions of its customers (often banks), and the price of its services is negligible compared to the amounts of the loans at risk. We estimate that North American credit bureau revenues represent about 1 to 2 basis points of total household debt. Because data accuracy and completeness are critical to credit decision-making, lenders often use more than one credit bureau, and we don’t believe pricing is the primary factor. choice of a credit bureau. We believe the barriers to entry into the credit bureau industry are high, as replicating a database of millions of customers would be incredibly difficult. »

–Rajiv Bhatia, analyst

Zimmer Biomet (ZBH)

“Zimmer’s moat comes from two main sources: transfer costs and intangibles.

“First, there are substantial switching costs for orthopedic surgeons. The complete instrumentation or tool sets used to prepare the bones and install the implants are specific to each company. There is a steep learning curve to becoming proficient in using a company’s instrumentation. Also, compared to other specialists, the skills and experience of the orthopedic surgeon play an outsized role in the patient’s clinical outcome. These issues leave all surgeons reluctant to train and master multiple instrumentation systems, especially if the volume of the procedure is too low to maintain a high surgical setup with more than one system. Research has found that surgeons stay with their preferred vendor and sales rep for 5-15 years and use that vendor for approximately 95% of their orthopedic procedures during that time.

–Debbie S. Wang, Principal Analyst

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