At Morningstar, we love to look at solid stocks that happen to be trading at a discount. A useful tool to identify bad opportunities is the Morningstar Wide Moat Focus Index. It tracks companies earning Morningstar Economic Moat Ratings of Wide, and trades at the lowest current market price at fair value.
How does this cluster of high-quality names perform over time? Good; the index, which comprises most U.S. stocks, has beaten the broad -based Morningstar U.S. Market Index for the year to date and for the following three, five, and 10 year periods of this writing .
With those performance numbers on the index side, its constituents are a tasty hunting ground for investors looking for high -quality trading of stocks at reasonable prices.
In an effort to keep the index focused on the lowest expensive high -quality stocks, Morningstar regularly rebuilds the index. The index consists of two subportfolios containing 40 stocks each, many of which are overlapping positions. Subportfolios are reorganized every half year in alternating quarters on a “staggered” schedule. We re-evaluate index holders and add and remove stocks based on a preset procedure. Because stocks are equally weighted within each subportfolio, the restructuring process also involves rightsizing positions.
After the most recent reconstitution on March 18, half of the portfolio added 11 positions and removed 11 names.
Additions
Three industries have more than one stock added to the index.
Two software companies made the list. Adobe (ADBE) dominant when it comes to creative software, and we look forward to continuing to do so. Moreover, its well -rounded portfolio positions it as a digital market leader, according to Morningstar senior analyst Dan Romanoff.
Service Today (NOW) not only earns a broad moat rating but also boasts a positive moat trend. We think the company has done an extraordinary job of expanding beyond its software-as-a-service solution for IT service management into the larger IT operations management market, Romanoff said.
The subportfolio also added two asset managers. Black stone (BLK) is the largest asset manager in the world, and a growing ETF market; the strengthening of environmental, social, and governance analysis and investment; and ongoing technology efforts, among other factors, should continue to drive growth, says strategist Gregg Warren. T. Rowe Price (TROW), meanwhile, remains the best active asset manager position we cover in the United States, he says. The size and scale of the company’s operations, the strength of its brands, consistent outperformance, and reasonable fees give it an advantage.
Two internet retailers were also added. Etsy (ETSY) has carved out an interesting competitive niche with four marketplace characteristics focused on unbranded products, says analyst Sean Dunlop. The company’s competitive strategy is well underway, and its active customer base is growing.
Free Market (MELI) is a one-stop e-commerce solution for Latin American buyers and sellers. Customer expectations for faster shipping times and increased fulfillment entry should all but not replace the company’s services, Dunlop said.
The remaining additions came from a hodgepodge of industries: 3M (MMM) (conglomerates), Costar Group (CSGP) (real estate services), Ecolab (ECL) (special chemicals), Masco (MAS) (manufacturing products and equipment), and Teradyne (TER) (semiconductor equipment and materials).
Deletions
Stocks can be removed from the index for several reasons: If we downgrade their economic moats or if their price/fair value ratios rise significantly. All of the departures in the most recent reconstitution were pushed by stocks trading at more attractive price/fair value ratios during the restructuring.
High Quality Stocks in the Bargain Bin
Here are the 10 cheapest stocks on the Morningstar Wide Moat Focus Index on March 24th.
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