4 Wide-Moat Stocks to Buy for the Long Term While They’re Undervalued Today

Susan Dziubinski: Hello, and welcome to a special edition of The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I sit down with Morningstar Research Services Chief US Market Strategist Dave Sekera to discuss what’s on his radar this week, some new Morningstar research, and a few stock picks or pans for the week ahead. But this week, we’re breaking format.

We’re answering questions from you, The Morning Filter viewers. Thank you for submitting your questions to us. If you don’t get your question answered in this mailbag episode, or if you’d like your question answered on a future episode, reach out to us with your questions at TheMorningFilter@morningstar.com. While we can’t answer each question individually, we will read them all and weave them into upcoming episodes of The Morning Filter.

So we’ll start out with some broad questions from viewers, and we’ll then cover some specific stocks that viewers want to hear your opinion about. Are you ready, Dave?

David Sekera: Hey, good morning Susan. Yeah, this is actually going to be a fun change of pace this week. I’m certainly looking forward to it. So let’s go ahead. What do you have to start?

Dziubinski: All right. A viewer asks, “Dave, how do you decide what stocks to profile? You review a number of stocks repeatedly, such as Nvidia, U.S. Bank, Kellogg, and Lyft.” So that’s the question. But maybe it’d be useful here, Dave, to distinguish between the stocks we talk about on the show, in general, and then how you choose your stock picks every week.

So start out with the former.

Sekera: Sure. So in general first I’m always going to start off taking a look at the mega-cap stocks. I mean, just since they are so large as a percent of market capitalization, when they report earnings, that certainly has the ability to shift market sentiment, and swings in their equity prices will also impact the broad index levels.

Next I’m going to look for companies where upcoming earnings, where we have a differentiated view. So typically looking for stocks that we think are either overvalued or undervalued. Sometimes maybe these stocks are fairly valued but we think will have implications for other stocks within the sector. And then lastly take a look at stocks where earnings might have a broader impact on some of our existing investment theses or themes or sector outlook overall. And then as far as those stocks that have already reported earnings, I’m going to look for those where we have a differentiated take away from earnings. So maybe the stock moved the opposite way that we would have expected. Maybe our fair value is unchanged but the stock had a big price movement up or down.

Conversely maybe our fair value changed a lot, but then it didn’t change all that much in the stock market. And then lastly, those that have significant implications for specific stocks within that sector, our investment thesis for that sector or just maybe more broader economic implications.

Dziubinski: So then let’s talk about the second half of that question, which is explaining to viewers how you decide what your picks are going to be every week. Maybe you can also specifically talk about how you use Morningstar’s various different ratings to arrive at those picks.

Sekera: When we do the stock picks, we try to look for stock picks that are going to be related to what we usually talk about, like in the first two sections of our show, typically we’re more focused on buy ideas than sell ideas. I mean, it seems like that’s more of interest to our viewers, looking for those buys, but every once in a while try and highlight maybe some swap ideas, what to sell, what to buy into, or maybe highlight some just outright sells where we think the stock has gotten just too overextended.

And then usually we try and make it interesting looking for thematic type of ideas. So we’ll look for ideas either within just a certain sector, maybe a specific category, things that maybe play into a certain investment thesis or maybe just looking at our economic moat ratings. Typically when I’m looking for individual stock picks, I’m looking for those that are undervalued.

So those that have a 4- or 5-star rating. Ideally, I like to try and pick stocks that have a wide or narrow economic moat. Those that we think have durable, long term, sustainable advantages. Also look for stocks that are going to be maybe in the lower end of our Uncertainty Rating scale. And of course looking for stocks that we think just have a good underlying long-term fundamental story as well as good momentum in the marketplace.

Dziubinski: Now we had a couple questions come in about lithium. One viewer asks “Is lithium pricing still on track to increase in the second half, or is it possibly getting pushed further out? Lithium had a short leg up this spring, but appears to be headed down again.” And then another viewer asked about the performance of Lithium Americas, specifically, this year.

The stock’s down about 50%.

Sekera: Yeah, lithium is definitely one of those areas over the past, I don’t know, three or four years at this point, I do think we’ve had a pretty differentiated view than the rest of the marketplace. So let me just give you a quick background on lithium prices to start off with. So in 2021 and 2022, lithium prices surged.

In fact, they didn’t just surge higher. They rose into territory that we considered to be a bubble. It was just well above our long-term price forecast. That bubble then popped in 2023. Some of it was due to short-term growth rates for sales and EVs slowed. But again, I think it was really a lot of just technical factors that caused that bubble to pop as well.

Now currently we think the lithium market is in the process of price starting to bottom out here. And in fact, looking through our research, Seth Goldstein—he covers Tesla as well as the basic materials sector and the lithium producers for us—as recently as May 14, he reiterated his call that he expects lithium prices to begin moving higher in the second half of this year.

But from the perspective of a long-term investor, looking forward, we still forecast that, by 2030, 40% of global new auto production will be electric vehicles and another 20% will be hybrids. So when you look at the amount of lithium that’s currently in production, and then we add to that the amount that’s scheduled to come online over the next decade, we still forecast that lithium will be undersupplied until 2030 or even longer.

So to some degree, whether lithium prices recovered this year or next year, these stocks are trading at just exceptionally large discounts to our intrinsic valuation. Now, as far as specific to Lithium Americas, that is a 5-star-rated stock. But I’m going to note this is a very speculative situation for the most part. It’s really a startup.

We rate it with a Very High Uncertainty Rating. Currently, the company just doesn’t really generate any revenue at all. It’s in the early stages of construction of its Thacker Pass project. But at this point it currently appears to be on track and on budget. So if you’re looking for lithium exposure, you’re willing to take on that higher, more speculative type risk.

This is a stock that’s pretty interesting if you want to play lithium, but you don’t want to take on that kind of risk. I point to maybe Albemarle. That’s one that is currently in production that has a lot less risk to it.

Dziubinski: Now, switching gears a little bit, a viewer writes, asking about what he’s been hearing in the media about the opportunities in utilities giving AI and data center growth. I know we talked a little bit about this in last week’s show. but the viewer is specifically asking, “What investments would you recommend to play this theme?”

Sekera: Yeah, I’ve actually noticed the same thing. I think it’s been about two months now that, for whatever reason, we’ve seen this increase in stories highlighting the expectation that artificial intelligence is going to end up resulting in a large increase in electric demand, specifically for data centers. And we agree. AI computing requires multiple times more electricity than traditional computing.

However, I think that if you’re just buying into utilities today to try and play this theme, to some degree, you’re already eight months too late to this game. So in our fourth-quarter 2023 US market outlook, we highlighted the utilities sector. At that point in time was trading at some of the lowest levels as compared to our valuations over the past decade.

And we did note at that point in time that fundamentally we didn’t think that the market was pricing these things correctly. The outlook to us was still as strong as we’d ever seen it. And at that point in time, we had already incorporated into our forecasts that electric demand growth from data centers would rise a cumulative 46% through 2032.

Now, if you do want to play this theme, one stock I’d recommend looking at is going to be WEC, Old Wisconsin Electric Company. It’s currently rated 4 stars. I think the dividend yield here is a little bit over 4%. And what’s going on here is there are a number of data centers that are currently under construction in Wisconsin.

So will benefit from that. And just looking going forward, we expect in a colder environment in the northern states such as Wisconsin, it just means that it will cost less to cool those data centers. So we do think that Wisconsin Electric will be a stock that plays on that theme. But irrespective of that, we do think that WEC combines best-in-class management, above-average growth opportunities, and is supported by a constructive regulatory environment.

Dziubinski: Well, it’s good to know those cold winters here in the Midwest are good for something. So that’s good news. Another viewer asks Dave what books are on the shelf behind you? Any recommendations of good investing? Books to read?

Sekera: We’ll take a quick look back here. So, first of all, Why Moats Matter. There you go. That’s an in-depth analysis on economic moats, the sources of their moats, and then actually even breaks it down by sector. So as far as trying to understand what is an economic moat, why it matters how it impacts, the valuation of a company.

This is actually written by a couple of women who used to run the equity research group here at Morningstar. To my other side here … oh, these are going to be a little bit more specialty type books. So the first one here, Distress Investing. Really, this is going to be much more about like, really how to look at deep-value plays.

Oftentimes, these are companies that are under a lot of pressure, maybe companies that are close to bankruptcy, and really trying to understand which of these deep-value plays might be interesting, how to play them, whether it’s the equity or the debt. This is a book I’ve had for a long time.

This is actually a really good one if you want to do your own analysis: Financial Shenanigans: how to detect accounting gimmicks and fraud in financial reports—walks through a lot of different ways in the accounting statements that maybe management teams are trying to inflate their revenue.

They’re trying to maybe post better operating margins. So again, what to look for in the accounting statements to highlight where management might be doing things that maybe they necessarily shouldn’t be doing. This one is actually more recent: Private Debt. So we’ve seen a huge increase really in the last three years. change in the debt markets, especially in more-levered type of situations where instead of going to the bank debt market, a lot of companies now are issuing private debt. That’s a theme where you get a lot of really good yield, but these are more lever type risky situations.

So again, it’s a little bit of trying to understand what’s going on and how that’s changing some of the other areas of the capital markets. And then lastly just a good general investing book, Mastering the Market Cycle. That’s by Howard Marks, probably one of the more famous people besides Warren Buffett in the industry as far as being probably one of the best value investors over the course of my career.

Another book I know is making the rounds right now across the equity analyst team is Ahead of the Curve. That’s a guide for forecasting business and market cycles by Joseph Ellis. Other than that, other things that I will always make sure I read, that’s going to be the annual report from Warren Buffett.

Howard Marks, I have his book, but he also publishes, I think, monthly newsletters, online so I always try and read those when those come out. As far as, besides just books, what do I listen to? So we do have Morningstar’s own Christine Benz. She puts out a podcast called The Long View.

If I’m watching CNBC or some of the other Fox Business any time, like maybe Jeff Gundlach, Kyle Bass, David Einhorn—if they’re on, I always stop and turn the volume up and listen to what they have to say. That’s kind of what I can think of offhand, actually.

I’m going to turn this one back to you, Susan. What do you recommend reading, and who are you currently listening to?

Dziubinski: Well, behind me are the rest of the Morningstar books that you don’t have on your shelf, Dave. We have The Ultimate Dividend Playbook. We have a couple of different guides to mutual funds. We have Christine’s 30-Minute Money Solutions. You mentioned Christine Benz, our colleague. She’s the head of personal finance and retirement planning at Morningstar.

She also has a new book coming out in fall on retirement that I got a sneak peek at. That’s excellent. So I’ll be watching for that. And I, too, am a listener of her podcast, The Long View. Like you, it’s kind of like, if you work at Morningstar, you do follow Warren Buffett and everything he says and does, so I’m a consumer of anytime he says or writes something. I also like reading—this is sort of very old school—but I like reading shareholder reports from top managers. People like Bill Nygren at Oakmark, the managers at Dodge and Cox, not only talking about their stock-selection process but just how they’re thinking about the markets, the economy, and investing.

And then I’m sort of more old school. I’m not really listening or watching things that are sort of alarmist and minute-by-minute. I’m more of a long-term approach to investing, so I’m consuming more like The Wall Street Journal and the Barron’s when it comes to what’s out there, that’s a little less alarmist than some of the things you might find elsewhere.

So that’s what I’m up to. All right. Dave, another somewhat topical: Another viewer asks, “Is there any history that supports a Fed rate cut just six weeks or so prior to a presidential election? Could this be perceived as favoring one side in the election?”

Sekera: I actually specifically talked to Preston Caldwell about this topic, and Preston is our chief US economist, and he’s noted that Fed officials just across the board have been quite emphatic that they’re just going to rely on the data as the data comes in, as far as any changes that they may make to monetary policy.

So we’re taking them at their word at this point in time. But as a side note, I know monetary policy does work with a lag. Now economists, they are going to debate back and forth how long that lag may be. But typically I think most people expect that’s going to be anywhere from six to 12 months.

So if you wanted to boost the economy in advance of the election, you probably actually would have had to already start cutting rates by now to make any real difference by November. But at the same point in time, I think it’s also hard to make the argument that the Fed should have started cutting rates by now. Inflation metrics have been coming in hotter than what they want.

So net net, I would say at this point it does appear that the Fed really is relying on that data, and we continue to expect them to do so.

Dziubinski: So now we’ll move on to some specific companies that viewers have told us that they want to hear about. The first is Palantir. The stock has been crushing it over the past year. What’s Morningstar think of the company and the stock?

Sekera: Yeah, I mean, this is just a really volatile stock. And if you look at the chart since its IPO, it’s traded as low as $6 and as high as $45. So maybe crushing it right now, but even after this rally it’s still trading below where it was in 2021. Now this was a 4-star-rated stock at the beginning of last year at the beginning of 2023.

It’s up know well over 200 and some percent since then. But we think it’s risen too far at this point. It’s now rated 2 stars. Trades, it looks like, at about over a 40% premium to our fair value. Now fundamentally we expect Palantir will materially benefit from increased AI spending. They are a leader in the AI platform space.

And when I look at our revenue and profitability estimates for the next two years, I would note we’re actually above most of the consensus views. However, it just appears the market has just gotten too far ahead of itself as far as valuation grows. And maybe our market is just pricing in too much growth for too long in this case.

Dziubinski: Now we have a couple of viewers asking about Intel. Looks like Morningstar recently cut its fair value on the stock. And the performance this year has been pretty awful. What’s going on here, Dave? And is there an opportunity for investors?

Sekera: It might not yet be the time to throw Intel in the bucket with the other legacy tech names, but man, it’s starting to feel a lot closer. So my understanding, talking to our equity analyst team here, is Intel essentially fell behind the curve on the last chip upgrade cycle. And now they’re trying to catch back up.

And that reduction in fair value came after Microsoft’s recent Build conference. We reduced our assumption around Intel’s PC processor revenue growth for the next several years. So what our team is seeing is that there’s an increase in the number of pieces that are now switching and using Qualcomm’s Snapdragon Elite processors as opposed to chips from Intel or AMD for that matter.

So right now, the stock trading pretty close to our fair value, 3-star-rated stock. My opinion: I think there’s just a lot better stories out there, especially ones that are trading at discounts, that I’d rather own than Intel. I think Intel has a lot of catching up to do over the next couple of years.

It’s going to have to spend a lot of money to catch up to the rest of the market. Plus, there’s also just going to be a lot of execution risk as their ability to do so.

Dziubinski: A viewer I’d like to hear more about Snowflake, which is another tech stock that’s getting hit pretty hard this year from a performance perspective.

Sekera: Yeah, it’s actually been a pretty disappointing year for Snowflake. We had actually thought this was going to be a pretty good second derivative play on artificial intelligence. But yeah, it just hasn’t worked out this way. Earlier this year, if I remember correctly, they had a management change. The prior CEO unexpectedly resigned.

At that point in time, they lowered their guidance for 2025. They pulled their longer-term guidance. They used to have guidance for several years out. And we lowered our fair value pretty meaningfully at that point in time. And the stock tanked and it looks like it just yet has to recover at this point.

Now, more recently, they reported first-quarter earnings. We noted we thought that they were pretty mixed. Now revenue growth was ahead of our expectations. But full-year guidance showed expected operating margins still moving in the wrong direction yet again. We did hold our fair value unchanged at that point in time. The stock has fallen enough to drop into the 4-star territory.

But I think for now, this is still a pretty risky situation. In our write-up, our equity analyst noted that if revenue growth continues to decelerate at this point that our fair value could be at risk more to the downside.

Dziubinski: And another viewer asks, “Why is the stock of Toronto-Dominion Bank so low at the moment? And does Morningstar think it’s a buy today?”

Sekera: To be honest, as the US market strategist, I probably don’t follow our Canadian coverage as closely as I should. But after reading our research here, it looks like there might be a little bit of hair on the stock at least here in the short term. TD is working through a number of different restructuring and acquisition-related expenses, which are pressuring it here in the short term.

Looks like they’re also taking a pretty large provision for potential losses due to antimoney laundering practices, which are being currently investigating by regulators. But having said all that, for investors with that long-term perspective, it is currently rated 4 stars. Trades somewhere in that midteens discount to fair value.

Pretty healthy dividend yield at 5.4%. And is a company that we rate with a wide economic moat.

Dziubinski: Now a viewer commented that we talk a lot on the show about economic moats. And sometimes your weekly picks are stocks with moats, but they’re not always. So today, you’ve brought viewers a special list of picks, four wide-moat stocks that look attractive today from a valuation perspective. So again, these are all wide-moat stocks.

The first one you’re going to talk about is Nike. And actually a viewer also asked about Nike and what you thought of it. So great pick Dave. Here’s a big brand whose stock is down quite a bit this year.

Sekera: And a little bit of a story stock. So when I look at the chart here, Nike stock initially surged in 2020 and 2021. At the beginning of the pandemic consumers shifted their spending to goods and away from services. And at that point the stock actually rose enough that it traded into 2-star territory, meaning that we thought it was overvalued.

And then in 2022, the stock started to slide. A lot of that was just once spending patterns began to normalize between goods and services, you saw sales and earnings slow down there. So at this point, it’s interesting, Nike stock, it’s actually given up all of the gains that it made during the pandemic.

And we’ve talked about for several shows now how middle-income consumers are really starting to feel the pressure from inflation. And in fact Nike’s also planned for relatively weak consumer demand through, at least, I think, the first half of 2025 as well. As a long-term investor, I think we have to look through and get past that.

When I look at our model here, our analyst currently forecasts average sales growth of 5% over the next 10 years. We’re looking for operating margins to gradually recover or get back up toward where they’ve been historically over that same forecasting time period. So it might take some time for this one to work.

But it is a 4-star-rated stock. Only has a 1.5% dividend yield—I’d kind of like to see a higher dividend yield—but it is a stock with a wide economic moat.

Dziubinski: All right. The next wide-moat stock pick this week is one I think we’ve talked about before. Zimmer Biomet—another name that’s had a tough few years—but you’d expect the company to be able to do well with all of the aging baby boomers needing large-joint replacement.

Sekera: Yeah, we recommended this one on our Jan. 8 show. And it has been relatively disappointing. That stock is down, I think, about 7% give or take since then. So for those of you that don’t know Zimmer Biomet, it is a leader in providing devices for joint reconstruction. We expect that longer-term, favorable demographics should work their way out.

You have the aging baby boomer population. You have rising obesity rates. All of that will support pretty solid demand for joint replacements over time. Now, we think it should be at more than enough demand to offset any kind of pricing pressures looking forward. First-quarter results, our analyst said she thought they were actually pretty decent, held very few surprises.

She thinks the company’s still on track to meet our full-year expectations, and our forecast here when I open up the model, don’t seem especially aggressive to me. We’re only forecasting average revenue growth of 4% through 2027. We’re looking for operating margins to improve to 28% over time. But that’s still lower than management’s goal of 30%.

So following that earnings report, we left our $175 fair value estimate unchanged. Leaves that stock in 5-star territory. And as you noted, a company with long-term durable competitive advantages, which earns that wide economic moat.

Dziubinski: Now, your third wide-moat stock pick this week is Clorox. The stock’s well off its pandemic highs when we were all texting our friends when we finally found some Clorox wipes in stock somewhere. But seems like a sound company from a fundamental perspective that looks undervalued, right?

Sekera: Yeah. Those Clorox wipes were worth more than gold as early days of the pandemic. We were probably actually too early in our recommendation to buy that stock. We first recommended it on our Jan. 30, 2023, show. The stock price is down 5% since then, but at least you’ve gotten some pretty decent dividend yield to help offset the lower price.

This is just another story of underlying fundamentals that are in the process of normalizing. The business is in process of rebuilding. It succumbed to a cyberattack in August 2023 that kind of threw it for a short-term loop back then. And then had the impact of inflation, consumers being under pressure.

That’s also kind of pushing the stock down here over the course of the past year as well. But in our view, from a longer-term perspective, we think the market is overextrapolating these near-term pressures too far into the future. So again, taking a look at our financial model here, looking at our projections, we’re only modeling in 2.6% compound annual growth over the next five years for the top line. We’re looking for a rebound in the operating margin toward more historical averages over that same time period, which between those two, leads us to a 15% average annual earnings growth. So again pretty decent earnings growth even if the top line isn’t moving all that fast.

When I look at the stock, trades at about 22 times. This year’s earnings estimates, 20 times next year’s earnings estimates. So puts it in that 4-star territory. Wide moat. Trading at a pretty healthy discount to your intrinsic value. And in the meantime you’re collecting about a 3.6% dividend yield.

Dziubinski: All right. Well your last wide-moat stock pick this week is Johnson & Johnson. This isn’t a stock that trades at a discount very often. So what’s the market missing here?

Sekera: Exactly. And that’s the thing I would probably highlight is when you look at where it’s traded over time, rarely does it trade at that much of a discount to our fair value. So right now it is a 4-star-rated stock, 3.4% dividend yield. Now I would note it’s right at the boundary between tripping the 3-star range.

So depending on the day and maybe where the stock is trading in the market, could either be a 3 star or a 4 star. But either way, I still look at Johnson & Johnson as being a core holding type of stock. It’s a company that we rate with a Low Uncertainty, wide economic moat. In fact, talking to Damien Conover, he’s the head of our healthcare equity analyst team.

He thinks it’s probably one of the widest moats in the healthcare sector. So the reason we think the stock is trading where it is today is they are going to face some competition from a biosimilar product beginning this summer. That will be a drag on growth here in the short term. But our equity analyst team, we’ve already factored that into our forecasting model.

We do forecast a number of different other products that will be coming online that should offset and help improve growth over the next four to five years. And again, our assumptions look relatively conservative to me. That five-year annual compounded revenue growth of 2.3%. And only leverage to like a 4% average annual earnings growth.

But your stock trades, I think just under 14 times our 2024 estimates and 13 times our 2025 estimate. So again, not necessarily something that’s going to be the big huge home run. But for investors looking for those core stock type holdings, I think this is one.

Dziubinski: Well thanks for your time this morning, Dave. And thank you, viewers, for your questions. Keep them coming. While we can’t answer each question personally, we will read them all and weave them into upcoming episodes of The Morning Filter. We hope you’ll join us again next Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this video and subscribe to Morningstar’s channel.

Have a great week!