2024-01-09 18:04:24 ET
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.
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 January 8, there were 79 international wide-moat stocks meeting our criteria (unchanged from last month).
Only 8.9% (7 stocks) of this wide-moat group earned a 5-star (most attractive) valuation rating. Here are they:
Company Name | Ticker |
Barry Callebaut AG | |
British American Tobacco PLC | |
Imperial Brands PLC | |
Roche Holding AG | |
Tencent Holdings Ltd | |
Yum China Holdings Inc | |
Alibaba Group Holding Ltd |
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!)
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 January 8:
Company Name | Ticker |
GSK PLC | |
Anheuser-Busch InBev SA/NV | |
Medtronic PLC | |
Baidu Inc | |
Singapore Exchange Ltd | |
OMRON Corp | |
Taiwan Semiconductor Manufacturing Co | |
Nabtesco Corp | |
Kao Corp | |
Nestle SA | |
JD.com Inc | |
Adyen NV | |
Daifuku Co Ltd | |
Edenred SA | |
Pernod Ricard SA | |
Reckitt Benckiser Group PLC | |
Unilever PLC | |
ASX Ltd | |
Safran SA | |
Ambev SA | |
Harmonic Drive Systems Inc | |
Sanofi SA | |
Compagnie Financiere Richemont SA | |
Fanuc Corp | |
Symrise AG | |
AstraZeneca PLC | |
MTU Aero Engines AG | |
Airbus SE | |
GEA Group AG | |
The Toronto-Dominion Bank | |
Allegion PLC | |
Schindler Holding AG | |
Assa Abloy AB |
All in all, we have 40 firms that pass our very first criteria.
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.
14 of the 40 stocks survived this second step . Here’s the list:
Company Name | Ticker |
Adyen NV | |
Alibaba Group Holding Ltd | |
Baidu Inc | |
Barry Callebaut AG | |
Compagnie Financiere Richemont SA | |
GEA Group AG | |
GSK PLC | |
JD.com Inc | |
Pernod Ricard SA | |
Roche Holding AG | |
Safran SA | |
Sanofi SA | |
Tencent Holdings Ltd | |
Yum China Holdings Inc |
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 January 8:
We also present the results in a table format to make your decision easier.
(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.
For further details see:
International Wide-Moat Stocks On Sale - The January 2024 Heat Map