When Morningstar (MORN) really likes a company, thinks it has competitive advantages that will last at least 20 years, the venerable financial research firm assigns it a wide moat.
Buying high-quality stocks should pay off if you buy them at a reasonable price. So Dave Sekera, Morningstar’s chief U.S. market strategist, has chosen a list of four stocks with wide moats that are undervalued according to Morningstar’s fair value estimates.
Financial Services and Healthcare Stocks
1. U.S. Bancorp (USB). Morningstar fair value estimate: $53. Thursday’s closing price: $33.29.
“What happened here is that U.S. Bank (USB) got caught in that downdraft of the regional bank selloff, following the bank failures earlier this year,” Sekera said. The stock has dropped 24% so far in 2023.
“U.S. Bank isn’t as large as a JPMorgan (JPM) or a Bank of America (BAC), but it is much larger than most regional banks. So we don’t think it’s going to be at nearly as much risk of deposit flight as some of the smaller regional banks.” And U.S. Bank has a 5.98% forward dividend yield.
2. Medtronic (MDT), the medical device company. Morningstar fair value estimate: $112. Thursday’s close: $88.25.
“It’s one of our better picks in the med tech area and in the healthcare space in particular,” Sekera said. That’s “because it has a lot of good exposure to products that will benefit the medical needs of aging baby boomers.”
Further, “pairing Medtronic's diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic's position as a key partner for its hospital customers,” Morningstar analyst Debbie Wang wrote in a commentary.
Food and Technology Stocks
3. Kellogg (K), the cereal company. Morningstar fair value estimate: $84. Thursday’s close: $65.94.
“We have seen the stock under some pressure from inflation, but we do expect that pressure will moderate over time,” Sekera said.
Meanwhile, “there is some negative sentiment in the market right now surrounding the plan to split up into the cereal business and the snacks business,” he said.
“But from an economic perspective, that really just doesn’t change the intrinsic value of those two companies.” And investors “will end up owning stock in both businesses, the combination of which we think is undervalued,” Sekera said. Kellogg also has a 3.57% forward dividend yield.
4. Tyler Technologies (TYL), a software provider for local governments. Morningstar fair value estimate: $475. Thursday’s close: $394.60.
“Within the technology sector, I think it’s more of a defensive play,” Sekera said. “It is a little-known company, but it provides software solutions and services to local and state governments and other government functions. So, even in a severe recession, I think this is one that would hold up pretty well.”
No matter the economic climate, “governments are still going to be able to pay their bills,” he said. “And there are [high] switching costs within Tyler’s economic moat, which keeps their customers from moving to competitors.”
The author of this story owns shares of U.S. Bancorp and Medtronic.
