The U.S. stock market has been rocky since the start of the year with high volatility as it comes to terms with high inflation, rising interest rates and post-pandemic dislocation. However, every dark cloud has a silver lining. Morningstar (MORN, Financial) recently said that the U.S. stock markets are now trading at a rarely seen (in recent times) discount. Specifically, the investing research firm said:
"As of May 31, 2022, the price/fair value of a composite of the stocks covered by our equity analyst team was 0.87 times. Since 2011, on a monthly basis, there have only been a few other instances in which the markets have traded at such a large discount to our intrinsic valuation.The current level of undervaluation is the greatest discount to fair value since the emergence of the pandemic in March 2020 and the growth scare that sent stocks lower in December 2018."
Morningstar published a list of what it considers to be high-quality stocks with good dividends which conservative investors may want to look at for the long term. These companies have wide economic moats and are in the company's "five star territory." A 5-star rating means the stock is undervalued and trading at an attractive discount relative to Morningstar's fair value estimate.
The Morningstar Economic Moat Rating is a qualitative criterion which represents a company's sustainable competitive advantages. Morningstar's moat categories are divided into “Wide Moat," “Narrow Moat” and “No Moat." The term "moat" was originally popularized by Warren Buffett (Trades, Portfolio) and refers to a business's ability to maintain competitive advantages in order to protect its long-term profits and market share. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders. A company with an economic moat can fend off competition and earn high returns on capital for many years to come.
From Morningstar's list of stocks with wide economic moats, here are four picks as well as my reasoning behind agreeing that these stocks have enduring competitive advantages. Additionally, these picks are trading in Morningstar's 5-star value territory and pay a dividend.
Compass Minerals International
Compass Minerals International (CMP, Financial) produces two main products, salt and specialty fertilizers, and is also developing magnesium and lithium extraction capabilities. The company's main assets include rock salt mines in Ontario, Louisiana and the United Kingdom and salt brine operations at the Great Salt Lake in Utah.
Compass' salt products are used by industrial and consumer end markets as well as municipal deicing. The firm also sells sulfate of potash, which is used by growers of high-value crops that are sensitive to standard potash. Compass is expanding its portfolio and plans to enter the fire-retardant market, with its magnesium chloride-based product used to combat forest fires. Compass plans to produce magnesium chloride and lithium as byproducts from its sulfate of potash operation in Utah.
The GuruFocus Value chart is flagging Compass as a possible value trap since it is trading so far below its fair value estimate while also seeing declining per-share profits in recent years.
However, I think the future looks brighter. Compass' recent decline appears to be because the company is locked into supplying deicing salt for municipalities, cities and airports for the season at fixed price and this combined with the sudden increase in fuel costs affected short-term earnings. I fully expect the company to adjust its pricing going forward and the stock to recover. There is no good substitute for deicing salt in the snow belt.
The salt assets (particularly in Ontario) are world class and located close to where the customers (i.e., cities and municipalities in Canada and North America) are; this is important due to high transportation costs of carrying salt, which is very heavy. The Ontario salt mine in at the shore (and below) the great lakes which makes transportation easy.
The potash business in Utah is booming and the company is making large investments to develop its lithium and Magnesium recovery business from the same brine, which is in its infancy but has great potential demand in the electric vehicle market.
Compass's GF Score is also mediocre with low scores in growth and financial strength due to heavy investments and declining profits. The company's earnings and growth are erratic due to the commodity nature of its products, where prices can swing from year to year.
Polaris Inc.
Polaris Inc. (PII, Financial) designs and manufactures off-road vehicles, including all-terrain vehicles for recreational and utility purposes, snowmobiles, on-road vehicles, and motorcycles, along with the related replacement parts, garments, and accessories. It has recently entered the boating segment as well.
The company is headquartered in Medina, Minnesota and operates through four segments: Off-Road, On-Road, Marine and Aftermarket. Its products are sold online and through dealers, distributors and retail stores principally located in the U.S., Europe, Mexico and Australia through wholly owned subsidiaries.
Polaris' competitive advantage or moat stems from its brand name and reputation among outdoor enthusiasts and a constant stream of innovation. This is reflected in the company's return on high invested capital (ROIC), which is consistently above its weighted average cost of capital (WACC).
The GF Value chart rates the stock as modestly undervalued.
Its GF Score at 95 is very healthy.
BlackRock
BlackRock Inc. (BLK, Financial) is the largest asset manager in the world, with about $9.6 trillion in assets under management. BlackRock provides investment management, risk management, and advisory services for institutional and retail clients worldwide. The company is headquartered in New York City and provides a range of investment and risk management services to institutional and retail clients.
Its diverse platform of active (alpha) and index (beta) investment strategies across asset classes enables the company to tailor investment and asset allocation solutions for clients. The firm's product offerings include single- and multi-asset portfolios investing in equities, fixed income, alternatives and money market instruments. Its products are offered directly and through intermediaries in a range of vehicles, including open-end and closed-end mutual funds, iShares exchange-traded funds (ETFs), separate accounts, collective investment funds and other pooled investment vehicles.
The firm also offers technology services, including the investment and risk management technology platform Aladdin, Aladdin Wealth, eFront, and Cachematrix, as well as advisory services and solutions. BlackRock's economic moat is due to its massive scale and breadth of offerings.
The GF Value chart rates BlackRock as modestly undervalued.
It also gets a very high GF Score of 94.
Comcast
Comcast (CMCSA, Financial) is a media and communications conglomerate headquartered in Philadelphia. It has three primary businesses: Comcast Cable, NBCUniversal and Sky. The widest moat belongs to the core cable business, which owns networks capable of providing television, internet access and phone services to nearly half of the U.S. Broadband cable networks like Comcast's operate in most areas as a duopoly with phone companies like AT&T (T, Financial) or Verizon (VZ, Financial). Once a broadband network is in place it's exceedingly difficult for a third competitor to enter the market economically.
Both the phone company and cable company networks are slowly being converted from legacy coaxial cable and copper, respectively, to optical fiber, but where they have not been converted (which is true for large parts of the country), coaxial cable has a massive advantage over copper phone lines in internet speed and reliability. It is estimated that 50% of the U.S. will not have optical fiber broadband by 2025, thus giving cable companies like Comcast an entrenched advantage.
Comcast acquired NBC-Universal (NBCU) from General Electric in 2011. NBCU owns several cable networks, including CNBC, MSNBC, and USA, the NBC broadcast network, several local NBC affiliates, Universal Studios, and several theme parks. Sky, was acquired in 2018, is the dominant television provider in the U.K. The company is also the largest pay-television provider in Italy.
Comcast is also modestly undervalued according to the the GF Value chart.
It also scores a decent 91 in the GF Score ranking.
Conclusion
Below is a table summarizing selected metrics for the stocks discussed in this article:
| Ticker | Company | GF Score | Market Cap($M) | FinancialStrength/10 | ProfitabilityRank/10 | GF ValueRank/10 | GrowthRank/10 | MomentumRank/10 | PredictabilityRank/5 | ValuationRank/10 | QualityRank/10 |
| CMP | Compass Minerals International Inc | 78 | 1,516 | 4 | 8 | 8 | 3 | 10 | 1 | 8 | 7 |
| CMCSA | Comcast Corp | 91 | 192,327 | 4 | 9 | 9 | 10 | 5 | 5 | 7 | 8 |
| BLK | BlackRock Inc | 94 | 101,770 | 6 | 9 | 9 | 10 | 5 | 5 | 5 | 9 |
| PII | Polaris Inc | 95 | 5,949 | 6 | 9 | 9 | 10 | 7 | 4 | 7 | 9 |
While I believe there is a decent probability that the U.S. economy may tip into a mild recession, that's not all bad news for value investors, as it gives us the opportunity to pick up high quality, wide moat stocks at lower prices. If a recession does materialize, wide moats stocks tend to be more resilient than most other stocks.
