In a new blog post, Morningstar investment specialist Susan Dziubinski celebrates the firm’s 40th anniversary with a sampling of some of the best stock investments that epitomize Morningstar’s approach to investing.
“Put simply, our approach to stock investing is to buy shares of great businesses at a discount to their worth,” Dziubinski writes.
These companies have solid competitive advantages that earn them wide moat ratings, meaning that analysts expect them to outearn their costs of capital for at least 20 years.
“We value companies by estimating their underlying cash flows,” she says.
When calculating fair value estimates, analysts look at a company’s fundamental value and where a stock is trading relative to that value — not where the stock is trading relative to its historical price or its competition.
Moreover, they assign a Morningstar star rating by taking into account the predictability of a company’s future cash flows, its uncertainty rating. A stock with higher uncertainty requires a larger margin of safety before earning a 4- or 5-star rating.
According to Dziubinski, how adeptly management makes capital allocation decisions is also an important consideration when buying a company’s stock. This matters because capital allocation decisions influence overall shareholder returns.
The Morningstar capital allocation rating considers how a company’s management has managed the balance sheet, investments and shareholder distributions. Analysts award an Exemplary rating to management teams that have done an outstanding job of allocating capital and that can be expected to continue to do so. They give teams that have done a weak job a Poor rating. Most management teams receive a Standard rating.
Morningstar at 40
In 1984, Morningstar founder Joe Mansueto began publishing quarterly “sourcebooks” that gave investors access to data and information about the nascent mutual fund industry that had been out of reach. Eventually, the firm rolled out its star rating for mutual funds, providing a visual representation of risk-adjusted historical return.
In Dziubinski’s telling, Morningstar over time began to analyze closed-end funds, variable annuities, American depositary receipts and eventually stocks and exchange-traded funds. Additional investor-friendly innovations followed, including the style box; meaningful fund category comparisons, rather than the prospectus objective; the Morningstar rating for stocks; and the Morningstar medalist ratings for funds.
Mansueto took the firm public in May 2005, and his 78% ownership stake became worth more than $600 million ($967 million in today’s money).
“By bringing an independent voice that focused on clarity, costs and long-term outcomes, Morningstar helped investors build confidence,” Dziubinski writes. “To this day, Morningstar’s mission is to empower investor success. And that mission continues to motivate the company’s longtime employees (like me).”
See the accompanying gallery, in alphabetical order, for 20 best stock, according to Morningstar. All earned economic moat ratings of wide and capital allocation ratings of exemplary, and all trade at 4- and 5-star ratings, meaning that they are undervalued. Year-to-date performance is as of May 10.
Read More: The 20 Best Stocks to Buy: Morningstar