Not all undervalued stocks are ideas for investors to consider, let alone names for them that will allocate capital. Hence, the concept of value traps.
Conversely, there are chances that volatile markets create valuation anomalies in high-quality equities. That is happening now because some market observers believe that a variety of high-quality stocks are being sold, including some of the holdings in VanEck Vectors Morningstar Wide Moat ETF (MOAT ).
To its credit, MOAT, which follows the Morningstar Wide Moat Focus Index, is showing courage this year, surpassing the S&P 500 by more than 400 basis points. That’s a proof of acceptance in companies with wide moats – a quality trait that is certain.
“In times of uncertainty, investors may want to have companies that offer some sense of certainty in terms of cash flows and company fundamentals,” said Susan Dziubinski of Morningstar.
Morningstar’s recently refreshed Best Companies to Own list features 10 ideas for June, and more than half of the names on the list are among MOAT’s 52 holdings. Dow component and cloud computing behemoth Salesforce (NYSE:CRM) is one such name.
“Salesforce has not been immune to the collapse of the technology sector this year. While the enterprise cloud computing solution provider is likely to face a decline in revenue growth below 20% at some point in the next few years, we think continued margin expansion will provide compound revenue growth that is more at 20% longer, ”Dziubinski said.
Veeva Systems (NASDAQ:VEEV), a provider of cloud computing services to the life sciences industry – one of the growing healthcare segments – is another MOAT held on the Morningstar list.
“We want the stock at this price, because of the company’s strong retention rate, constantly developing new applications, increasing penetration into existing customers, adding new customers, and expansion opportunities outside of those. life science, ”Dziubinski added, citing Morningstar analyst Dylan Finley.
Credit bureau Equifax (NYSE:EFX), Guidewire Software (NASDAQ:GWRE), ServiceNow (NYSE:NOW), and Tyler Technologies (NYSE:TYL) is the other MOAT holders that could be names to be considered in June, according to Morningstar. Adobe (NASDAQ:ADBE) is also part of the group. While Adobe has competition in some lower segments, the company is a broad moat name.
“Adobe’s stock is undervalued by approximately 32% after spending nearly 2021 which seems overvalued by our metrics. Adobe is a leader in content creation software thanks to its Photoshop and Illustrator solutions, both of which come with the broader subscription-based Creative Cloud, ”Dziubinski concludes.
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