International Wide-Moat Stocks On Sale - The October 2023 Heat Map

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.

ValeryEgorov

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 October 8, there were 92 international wide-moat stocks meeting our criteria.

Only 16.3% (15 stocks) of this wide-moat group earned a 5-star (most attractive) valuation rating. Here are they:

Company Name	Ticker
Anheuser-Busch InBev SA/NV	BUD
Barry Callebaut AG	OTCPK:BYCBF
Bayer AG	OTCPK:BAYRY
British American Tobacco p.l.c.	BTI
GSK plc	GSK
Imperial Brands PLC	OTCQX:IMBBY
JD.com, Inc.	JD
Roche Holding AG	OTCQX:RHHBY
Tencent Holdings Ltd	OTCPK:TCEHY
Yum China Holdings, Inc.	YUMC
Adyen N.V.	OTCPK:ADYEY
ASX Ltd	OTCPK:ASXFF
Taiwan Semiconductor Manufacturing Co	TSM
Medtronic plc	MDT
Harmonic Drive Systems Inc.	OTCPK:HSYDF

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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!)

Source: Data from Morningstar. Dataset after 12/2022 only contains international stocks.

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 October 8:

Company Name	Ticker
MTU Aero Engines AG	OTCPK:MTUAF
Airbus SE	OTCPK:EADSY
Alibaba Group Holding Ltd	BABA
Allegion plc	ALLE
Ambev S.A.	ABEV
Assa Abloy AB	OTCPK:ASAZY
Baidu, Inc.	BIDU
Daifuku Co., Ltd.	OTCPK:DFKCY
Edenred SE	OTC:EDNMF
Experian plc	OTCQX:EXPGF
Fanuc Corp	OTCPK:FANUY
GEA Group AG	OTCPK:GEAGF
Kao Corp	OTCPK:KAOOY
KONE Oyj	OTCPK:KNYJF
London Stock Exchange Group plc	OTCPK:LNSTY
Nabtesco Corp	OTCPK:NCTKY
Nestle S.A.	OTCPK:NSRGY
Novozymes A/S	OTCPK:NVZMF
OMRON Corp	OTCPK:OMRNY
Reckitt Benckiser Group plc	OTCPK:RBGPF
Safran SA	OTCPK:SAFRF
Sanofi SA	SNY
Schindler Holding AG	OTCPK:SHLAF
Singapore Exchange Ltd	OTCPK:SPXCY
Symrise AG	OTCPK:SYIEF
The Toronto-Dominion Bank	TD
Unilever PLC	UL
ASML Holding N.V.	ASML
Compagnie Financiere Richemont SA	OTCPK:CFRHF
Endeavour Group Ltd Ordinary Shares	OTCPK:EDVGF
Geberit AG	OTCPK:GBERY
Royal Bank of Canada	RY
Spirax-Sarco Engineering plc	OTCPK:SPXSF
Pernod Ricard SA	OTCPK:PDRDF
BAE Systems plc	OTCPK:BAESY
AstraZeneca PLC	AZN
Sartorius Stedim Biotech S.A.	OTCPK:SDMHF
Diageo plc	DEO
Core Laboratories NV	CLB
Shimano Inc.	OTCPK:SMNNY

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All in all, we have 55 firms that pass our very first criteria.

Source: Data from Morningstar. Dataset after 12/2022 only contains international stocks.

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.

18 of the 55 stocks survived this second step. Here's the list:

Company Name	Ticker
Adyen N.V.	ADYEY
Ambev S.A.	ABEV
Barry Callebaut AG	BYCBF
Compagnie Financiere Richemont SA	CFRHF
Diageo plc	DEO
Endeavour Group Ltd Ordinary Shares	EDVGF
Fanuc Corp	FANUY
GEA Group AG	GEAGF
JD.com, Inc.	JD
MTU Aero Engines AG	MTUAF
Novozymes A/S B	NVZMF
OMRON Corp	OMRNY
Pernod Ricard SA	PDRDF
Roche Holding AG	RHHBY
Safran SA	SAFRF
Shimano Inc.	SMNNY
Singapore Exchange Ltd	SPXCY
Taiwan Semiconductor Manufacturing Co	TSM

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We are rather strict when it comes to historical valuation. There are stocks that unquestionably fail both our 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 October 8:

Source: Institutional Shareholder Services Inc.

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

Source: Institutional Shareholder Services Inc., Morningstar

(Stocks highlighted in light blue are Morningstar's 5-star-rated international 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 stocks that have a 5-star Morningstar rating and/or finish 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of TCEHY 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.