High-quality stocks are often a haven for investors in a downturn, but during the current one, companies with robust competitive advantages are taking much harder hits than the overall market, Lauren Solberg, a Morningstar data journalist, wrote in a blog post this week.
These big share declines present long-term investors with an opportunity to buy high-quality stocks at low prices.
Solberg has in mind companies that earn wide Morningstar Economic Moat Ratings. This means that they have strong competitive advantages that should help them outperform their peers over the next 20 or more years. Less than one quarter of all stocks in Morningstar’s coverage are considered wide moat.
According to Solberg, wide-moat stocks as a group have outperformed stocks without economic moats in four of the past five calendar years. They tend to do better than the market, especially in market downturns, she said.
Not this year. The Morningstar Wide Moat Index, a collection of all the wide-moat companies in the Morningstar US Market Index, has lost 20%, while the narrow-moat and no-moat indexes each are down 15.9%.
So, where is the good news? According to Solberg, companies with Morningstar Ratings of 5 stars — stocks that trade at the steepest discount to their analyst-assessed fair market value — that also carry wide moat ratings are coming out of the woodwork.
Seventeen companies in the Morningstar Wide Moat Index are currently trading at 5-star prices: That’s 12% of the index. In the past five years, just 1% of the companies in the index, on average, were ever rated as a 5-star stock.
Solberg notes that steep losses for high-quality companies have pushed the Morningstar Wide Moat Index closer to undervalued territory, as 80% of the newly minted 5-star stocks in the index have lost more in 2022 than in any other calendar year over the past decade.
Morningstar analysts screened the Wide Moat Index for a list of high-quality companies that moved into 5-star price ranges over the past month.
See the gallery for 11 stocks now trading well below their fair value estimates, ranked by the degree to which they are undervalued.