Wide-Moat Stocks On Sale - The July 2022 Heat Map

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The FALCON Method
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Summary

  • Our 3-step process focuses on wide-moat stocks (as per Morningstar’s rating).
  • We are only interested in those targets that are attractively valued in historical comparison.
  • We share the heat map of the most investable candidates that may be worth your time for further analysis.

Bodiam kastély Angliában

ValeryEgorov/iStock Editorial via Getty Images

Step One: Wide-moat stocks with 5-star and 4-star ratings

Historical evidence says that while quality alone is a poor indicator of outperformance, when combined with a decent valuation filter, Morningstar’s moat rating proves to be more than useful. Based on the available data, stocks with a wide-moat rating that also fit into the 4- or 5-star category deserve to be the subject of further analysis. See the detailed explanation and the underlying evidence of our first step in this article.

We focus on those companies that are covered by a Morningstar analyst as assigning a wide-moat rating without thorough analysis is a questionable practice in our opinion. As of June 30, there were 184 wide-moat stocks meeting our criteria, unchanged from last month.

Only 17.9% (33 stocks) of this wide-moat group earned a 5-star (most attractive) valuation rating. Here are they:

Company Name

Ticker

3M Co

MMM

Amazon.com Inc

AMZN

Biogen Inc

BIIB

Comcast Corp Class A

CMCSA

Compass Minerals International

CMP

Equifax Inc

EFX

Etsy Inc

ETSY

Meta Platforms Inc

META

Guidewire Software Inc

GWRE

Intel Corp

INTC

Lam Research Corp

LRCX

Masco Corp

MAS

MercadoLibre Inc

MELI

Microchip Technology Inc

MCHP

Polaris Inc

PII

Rockwell Automation Inc

ROK

Salesforce Inc

CRM

ServiceNow Inc

NOW

Teradyne Inc

TER

The Walt Disney Co

DIS

TransUnion

TRU

Tyler Technologies Inc

TYL

Wells Fargo & Co

WFC

Yum China Holdings Inc

YUMC

Zimmer Biomet Holdings Inc

ZBH

Anheuser-Busch InBev SA/NV

BUD

ASML Holding NV

ASML

Experian PLC

OTCQX:EXPGY

Imperial Brands PLC

OTCQX:IMBBY

James Hardie Industries PLC

JHX

Roche Holding AG

OTCQX:RHHBY

Taiwan Semiconductor Manufacturing Co Ltd

TSM

Tencent Holdings Ltd

OTCPK:TCEHY

We believe that the percentage of 5-star-rated wide-moat stocks is a good indicator of market sentiment. When this percentage is high, even the best companies are on sale. When the percentage is extremely low, market conditions may warrant caution. (Please note that this is not an indicator for market timing!)

5-star rated wide-moat stocks

Source: Data from Morningstar

As these best of breed companies may be worth a closer look even when they are just slightly cheaper than their fair value but are not in the bargain bin, we also list the 4-star-rated wide-moat stocks as of June 30:

Company Name

Ticker

Adobe Inc

ADBE

Alphabet Inc A

GOOGL

Altria Group Inc

MO

American Express Co

AXP

Analog Devices Inc

ADI

Applied Materials Inc

AMAT

Autodesk Inc

ADSK

Bank of America Corp

BAC

Bank of New York Mellon Corp

BK

Berkshire Hathaway Inc B

BRK.B

Blackbaud Inc

BLKB

BlackRock Inc

BLK

Boeing Co

BA

Charles Schwab Corp

SCHW

Chipotle Mexican Grill Inc

CMG

Clorox Co

CLX

Ecolab Inc

ECL

Emerson Electric Co

EMR

Enterprise Products Partners LP

EPD

Fortinet Inc

FTNT

Gilead Sciences Inc

GILD

Graco Inc

GGG

Harley-Davidson Inc

HOG

Honeywell International Inc

HON

Intercontinental Exchange Inc

ICE

International Flavors & Fragrances

IFF

Intuit Inc

INTU

JPMorgan Chase & Co

JPM

Kellogg Co

K

Keysight Technologies Inc

KEYS

KLA Corp

KLAC

Lowe's Companies Inc

LOW

MarketAxess Holdings Inc

MKTX

Mastercard Inc A

MA

Microsoft Corp

MSFT

Monolithic Power Systems Inc

MPWR

Moody's Corporation

MCO

Nike Inc B

NKE

NVIDIA Corp

NVDA

Palo Alto Networks Inc

PANW

Roper Technologies Inc

ROP

S&P Global Inc

SPGI

Starbucks Corp

SBUX

State Street Corporation

STT

T. Rowe Price Group Inc

TROW

The Western Union Co

WU

Tradeweb Markets Inc

TW

TransDigm Group Inc

TDG

U.S. Bancorp

USB

Veeva Systems Inc Class A

VEEV

VeriSign Inc

VRSN

Visa Inc Class A

V

Walmart Inc

WMT

Workday Inc Class A

WDAY

John Wiley & Sons Inc Class A

WLY

ABB Ltd

ABB

Airbus SE

OTCPK:EADSY

Alibaba Group Holding Ltd

BABA

Allegion PLC

ALLE

Ambev SA

ABEV

Baidu Inc

BIDU

Bayer AG

OTCPK:BAYRY

British American Tobacco PLC A

BTI

Check Point Software Technologies Ltd

CHKP

Core Laboratories NV

CLB

Fanuc Corp

OTCPK:FANUY

GlaxoSmithKline PLC

GSK

JD.com Inc

JD

Medtronic PLC

MDT

Novartis AG

NVS

Royal Bank of Canada

RY

Sanofi SA

SNY

The Toronto-Dominion Bank

TD

Unilever PLC

UL

All in all, we have 107 firms that pass our very first criteria. (Up from 90 a month ago.)

Percentage of 4 and 5-star rated wide-moat stocks

Source: Data from Morningstar

Step Two: Historical Valuation in the EVA Framework

We believe that the most widely used valuation multiples are terribly flawed. See this article on why we consider the Future Growth Reliance metric the best-of-breed sentiment indicator that addresses accounting distortions, thus gives us a true picture of which wide-moat companies seem attractively valued in historical terms. We want to buy our top-quality targets when the baked-in expectations are low, since that is when surprising on the upside has the highest probability. As investment is a game of probabilities, all we can do is stack the odds in our favor as much as possible.

66 of the 107 stocks survived this second step. Here’s the list:

Company Name

Ticker

3M Co

MMM

ABB Ltd

ABB

Adobe Inc

ADBE

Airbus SE

OTCPK:EADSY

Alibaba Group Holding Ltd

BABA

Allegion PLC

ALLE

Alphabet Inc A

GOOGL

Altria Group Inc

MO

Amazon.com Inc

AMZN

Ambev SA

ABEV

American Express Co

AXP

Analog Devices Inc

ADI

Applied Materials Inc

AMAT

Autodesk Inc

ADSK

Bayer AG

OTCPK:BAYRY

Berkshire Hathaway Inc B

BRK.B

Blackbaud Inc

BLKB

BlackRock Inc

BLK

Chipotle Mexican Grill Inc

CMG

Comcast Corp Class A

CMCSA

Emerson Electric Co

EMR

Equifax Inc

EFX

Etsy Inc

ETSY

Experian PLC

OTCQX:EXPGY

Fanuc Corp

OTCPK:FANUY

Graco Inc

GGG

Harley-Davidson Inc

HOG

Imperial Brands PLC

OTCQX:IMBBY

Intel Corp

INTC

Intercontinental Exchange Inc

ICE

Intuit Inc

INTU

JPMorgan Chase & Co

JPM

Kellogg Co

K

Keysight Technologies Inc

KEYS

KLA Corp

KLAC

Lam Research Corp

LRCX

Lowe's Companies Inc

LOW

MarketAxess Holdings Inc

MKTX

Masco Corp

MAS

Mastercard Inc A

MA

Meta Platforms Inc

META

Microchip Technology Inc

MCHP

Nike Inc B

NKE

Novartis AG

NVS

Polaris Inc

PII

T. Rowe Price Group Inc

TROW

Roche Holding AG

OTCQX:RHHBY

Royal Bank of Canada

RY

Salesforce.com Inc

CRM

Sanofi SA

SNY

ServiceNow Inc

NOW

Starbucks Corp

SBUX

State Street Corporation

STT

Taiwan Semiconductor Manufacturing Co Ltd

TSM

Tencent Holdings Ltd

OTCPK:TCEHY

Teradyne Inc

TER

The Toronto-Dominion Bank

TD

Tradeweb Markets Inc

TW

TransUnion

TRU

Unilever PLC

UL

Veeva Systems Inc Class A

VEEV

VeriSign Inc

VRSN

Visa Inc Class A

V

Walmart Inc

WMT

The Western Union Co

WU

Workday Inc Class A

WDAY

We are rather strict when it comes to historical valuation. There are stocks that unquestionably fail both or short- and long-term tests. There are some targets, however, that may look attractively valued if you only focus on the short-term (like the last 5 years), but the longer you zoom out, the more you lose your appetite. It comes down to personal preference where you draw the line. For us, only those stocks are allowed to appear on the heat map in our third step that seem attractively valued in both a short-term and long-term context. (We go back as far as 20 years, calculate averages and medians on different time frames and let our algorithm do the ruthless work.)

Step Three: The Heat Map of the most investable wide-moat stocks

Seeing the stocks of our shortlist on a heat map with a quality and valuation axis is something that can prove very useful when we need to make a decision on which candidates to analyze thoroughly. As explained in our previous article, we use the PRVit (Performance-Risk-Valuation investment technology) model of the EVA Dimensions team.

All in all, PRVit is a multifactor quantitative stock selection model based on EVA-centric measures of Performance, Risk, and Valuation. It first estimates the fundamental value of a company based on its risk-adjusted EVA performance (shown on the vertical axis) and then compares it to its actual valuation (shown on the horizontal axis). All factors in this model were chosen heuristically based on common sense, and not by data mining, yet strong and statistically significant backtests prove the soundness of the PRVit approach both in the U.S. and globally. (See the details here.)

Here is the heat map as of June 30:

PRVit Global Score vs Market

Source: Institutional Shareholder Services Inc.

We also present the results in a table format to make your decision easier.

Wide-Moat Stocks On Sale - The July 2022 Heat Map

Source: Institutional Shareholder Services Inc., Morningstar

(Stocks highlighted in light blue are Morningstar’s 5-star-rated wide-moat names that survived the second step of our process.)

In PRVit, the factors are grouped into three categories: Performance, Risk, and Valuation. Each company has a composite 0-100 score in each category, where higher is better for Performance and lower is better for Risk and Valuation. We believe that stocks in the upper quintile of the PRVit ranking (with a PRVit score above 80) are worth a closer look.

We plan to run this three-step process on a monthly basis and publish the shortlist of targets it produces. If you don't want to miss any of these pieces, please scroll up and click "Follow."

This article was written by

The FALCON Method profile picture
11.88K Followers
The FALCON Method is a monthly newsletter service, resting on an evidence-based stock selection process that serves the construction of a buy and hold portfolio with both an income and total return focus. All the elements of the FALCON Method are proven to support outperformance and combining them further increases the odds of achieving outstanding results. We conduct our research in the shareholder-value-focused EVA (Economic Value Added) framework, and provide exclusive content to our Seeking Alpha readers with a pronounced focus on quality compounders or "EVA Monsters".
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Disclosure: I/we have a beneficial long position in the shares of AMZN, GOOGL, SBUX, TCEHY, BABA, META, TROW, BLK, LOW either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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