2023-11-06 07:55:15 ET
Summary
- The VanEck Morningstar Wide Moat ETF is an actively managed fund that seeks out companies with competitive advantages and cheap valuations.
- The ETF has outperformed the S&P 500 but not the NASDAQ.
- The portfolio does not include Apple, Meta, and Nvidia, raising questions about their moats and valuation.
Summary
The VanEck Morningstar Wide Moat ETF ( MOAT ) follows the Morningstar Wide Moat Focus Index, which is adjusted or reconstituted every 6 months based on Morningstar´s proprietary research that seeks out companies that have significant competitive advantages as well as relatively cheap valuation on Morningstar’s ( MORN ) value parameters. This means that this ETF is an actively managed fund seeking alpha vs. the broader markets.
MOAT Strategy (Image by Morningstar)
Performance
So far it has been relatively successful beating the SP500 ( SPX ) but not the NASDAQ ( NDX ).
MOAT Performance vs Market (Created by author with data from Capital IQ)
Portfolio Overview
What sticks out is the ETF's absence of Apple (AAPL), Meta ( META ), and Nvidia ( NVDA ), at least in the current holdings. Does Morningstar believe that those companies do not have moats and or not cheap from a price to cashflow perspective?
This ETF is not a big cap focus nor tech nor value or growth per say, it is a collection of best stock ideas formulate by Morningstar research. I calculated, with consensus price targets, that the ETF has a 18% potential upside to YE24.
MOAT Consensus Price Target (Created by author with data from Capital IQ)
Revenue Growth
In a moat type company, I would expect to see, if not high revenue growth, consistency. Using consensus estimates for all 50 stocks in the current portfolio, I calculated revenue growth of 7% for the YE24-25 period. However, as can be seen in the table below, there is volatility in many of the names. Pfizer ( PFE ) stands out, due to the end of covid treatments, as well as Emerson ( EMR ) to name a few.
In the last column I compared absolute estimated revenue in YE25 vs reported revenue in YE22 to gauge long term growth post pandemic. It appears that this is a low demand growth portfolio with just a 16% increase vs YE22.
MOAT Consensus Revenue (Created by author with data from Capital IQ)
Net Margins
A characteristic of a moat company should be pricing power, and this is reflected in margins, some sectors and specific stocks may be more impacted by depreciation, debt costs and taxes. Overall, this set of stocks has over 20% net margins, very healthy in my view. A few outliers are Estee Lauder ( EL ), who is having a terrible year and Guidewire ( GWRE ) that has moved from negative 4% to an estimated 10% in YE25.
MOAT Consensus Net Margin (Created by author with data from Capital IQ)
EPS Growth
Given the low revenue growth I would not expect very high EPS growth from the current portfolio, so I was surprised to see over 14% EPS growth estimated in the YE24-25 period. As with revenue, there is a high degree of volatility with many stocks posting declines in YE23 most likely due to over earning in YE22. I also compared absolute EPS estimated for YE25 with reported in YE22 and found that earnings are 24% higher, which is respectable rate. A few outliers are Teradyne ( TER ) and International Flavors & Fragrances ( IFF ) with over 25% EPS growth rates.
MOAT Consensus EPS Growth (Created by author with data from Capital IQ)
Valuation
While the portfolio strategy explicitly states that it does not focus on earnings growth and a PE valuation metric, I find it relevant and calculated the PE and PEG ratio using consensus estimates. I found the portfolio not to be cheap at 1.7x PEG. The consensus price target backs into an implied PE multiple target of 23x. This is a bit above the SP500, and I would assume a moat investment strategy relies more on consistency, earnings quality and cashflow generation vs. pure growth. The best relative valuation stocks are Charles Schwab ( SCHW ) and ( EL ) both are having a difficult 2023 with market expectations of a rebound or normalization in 2024-25.
MOAT Consensus Valuation (Created by author with data from Capital IQ)
Conclusion
I rate the MOAT a BUY. The very positive track record based on proprietary research and valuation process from Morningstar that combines with active management has proven alpha generation. Investors may take advantage of this stock picking and monitor for of the radar ideas within the holdings.
For further details see:
MOAT: A Strategy That Generates Alpha