With the S&P 500 having dropped 19% this year, now might be a good time to consider buying some stocks.
Morningstar has put together a list of what it sees the best stocks to own in various sectors. We’re focusing this story on the consumer-defensive sector.
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.”
ESG and Cash Flow Are Factors in the List
Environmental/social/governance factors also play a role. “A company’s longevity and competitive advantage are inherently tied to sustainability,” Morningstar said.
“So our analysis takes ESG considerations into account. The best companies have business models that allow them to effectively navigate evolving ESG issues that could materially impact their business.”
Other factors play a role, 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.”
Morningstar doesn’t recommend that you buy all these stocks now. About half the ones that made its list recently traded above the firm’s fair-value estimates.
With that in mind, here are the 10 companies on Morningstar’s roster the stocks of which recently traded below its fair-value estimates. The companies are in alphabetical order.
1. Ambev (ABEV), a beer company
2. Anheuser-Busch InBev (BUD), also a brewer
3. Brown-Forman (BF.B), a liquor company
4. Clorox (CLX), the cleaning-products stalwart
5. Constellation Brands (STZ), an alcoholic beverage company
6. Costco (COST), the warehouse-club retailer
7. Estee Lauder (EL), the cosmetics giant
8. Mondelez (MDLZ), the international foods producer
9. Reckitt Benckiser (RBGLY) , the producer of consumer products, including Lysol
10. Unilever (UL), the consumer-products giant
Here is Morningstar’s commentary on two of the stocks, chosen randomly.
Anheuser-Busch InBev: Morningstar analyst Philip Gorham puts fair value for the maker of Budweiser at $90, 51% above recent trades at $59.50.
“Anheuser-Busch reported third-quarter results that were broadly consistent with our forecasts,” he wrote in a commentary.
“At a time when consumer products companies are passing through material cost increases to consumers, who are already facing higher interest rates and energy prices, we regard an in-line quarter as good news.”
Further, “we continue to think that ABI is undervalued and that the scale of the business and its strong relationships with its vendors make this a high-quality franchise,” Gorham said.
Reckitt-Benckiser: Morningstar analyst Diana Radu puts fair value for the U.K. company at $15.40. That's 9.2% above recently trades at $14.10.
“Reckitt’s third-quarter [earnings report] delivered few surprises, with the strong top-line growth momentum continuing amid hefty pricing actions,” she wrote in a commentary.
“The results still point to unwavering pricing power and overall low price elasticity.” Radu did lower her fair value estimate from $16.20 in October, but that was due to a weaker pound rather than weakening fundamentals for Reckitt.
The author of this story owns shares of Clorox and Unilever.
