With the S&P 500 having lost 20% year to date, you may be thinking now is a good time to snap up some stocks.
If so, you might have a look at Morningstar's list of the “best stocks to own” in various industries. We’re focusing this story on technology stocks that appear on the roster.
So how does Morningstar define “best stocks”?
It’s companies with wide moats, which means a strong and sustainable edge over their competitors. “We’re confident that they will produce returns that outweigh their costs for the next 20 years or more,” Morningstar says.
“The strength of their competitive advantages is also either steady or increasing, which adds to our confidence in their long-term growth.”
Environmental/social/governance (ESG) factors also play a role. “The best companies have business models that allow them to effectively navigate evolving ESG issues that could materially impact their business,” Morningstar said.
Other metrics are involved, too. “The companies that make our list have predictable cash flows, so our analysts can more accurately estimate how much the businesses are worth,” Morningstar said. “These companies also make smart decisions about how they manage and invest their money.”
Tech Sector ‘Infamously Ripe for Disruptors'
As for the technology sector, it’s “infamously ripe for disruptors,” Morningstar said. “But some companies have been able to carve out pockets of stability.” And these are the ones that appear on its list.
Here are 10 technology stocks cited by Morningstar that recently traded beneath its fair value estimates. They are listed in descending order of market capitalization.
- Microsoft (MSFT), the software giant
- Taiwan Semiconductor Manufacturing (TSM), the chip maker
- ASML Holding (ASML), a Dutch maker of photolithography systems for chip making
- Cisco Systems (CSCO), the networking equipment provider
- Intuit (INTU), the accounting company
- Analog Devices (ADI), a semiconductor maker
- KLA (KLAC), a maker of diagnostic and control systems for chip makers
- Amphenol (APH), a sensor and connecter supplier
- Autodesk (ADSK), an application software company
- Microchip Technology (MCHP), a semiconductor maker
Microsoft: Morningstar analyst Dan Romanoff puts fair value for the stock at $320. It recently traded at $236.
“We continue to find encouragement in Azure, Office E5 [enterprise software] migration, and traction with the Power platform [business intelligence software] for long-term value creation,” he wrote in a commentary. “But we think near-term pressures will not be exhausted within the next quarter.”
As for Azure, “the firm continues to use its on-premises dominance to allow clients to move to the cloud at their own pace,” Romanoff said.
ASML: Morningstar analyst Abhinav Davuluri puts fair value for the stock at $700. It recently traded at $502.
“ASML is the predominant supplier of photolithography equipment for semiconductor manufacturers,” he wrote in a commentary.
“We expect it to materially benefit from the proliferation of extreme ultraviolet (EUV) lithography, and we believe the uncertainty concerning the long-term extent of EUV insertion has sufficiently diminished to justify a wide moat rating.”
The author of this story owns shares of Microsoft and Cisco.
