Morningstar Advisor - February/March 2011 - (Page 76)

By the Numbers: Stocks Undervalued Stocks With Wide Moats Undervalued stocks with significant competitive advantages can make attractive long-term holdings. With that in mind, we scoured our 2,000-plus stock coverage universe for high-quality stocks (those boasting wide economic moats) that are trading on the cheap (rated 4 or 5 stars by our analysts). Our analysts award wide economic moats to companies that they believe possess durable competitive advantages that are likely to confer economic profits well into the future. When a stock trades at a suitably wide discount to our estimate, we award it 4 or 5 stars. The wider the discount, the higher the star rating, and vice versa. There were 42 stocks that fit that profile as of Dec. 31, 2010, nine fewer than made the list on Oct. 31, 2010. Name Industry One of the most talked about events of the fourth quarter was the Fed formally announcing its second round of quantitative easing that it had been hinting at for months. Simply put, the central bank committed to buying $600 billion of long-dated Treasury bonds in an attempt to keep rates low, stave off deflation, move investors into riskier assets, and boost exports. Although the jury is still out if the plan will work or if unintended consequences will crop up, the markets have generally cheered the policy. Many hope that this round of quantitative easing will be able to firmly push the broader economy into a robust recovery. Morningstar director of economic analysis Bob Johnson thinks improved consumer spending will push the economy over the tipping point. Johnson sees higher employment levels and higher asMarket Cap ($Mil) EPS TTM set prices, combined with a substantial (though largely unrecognized) improvement in consumer financial positions and lower payroll taxes as the primary factors driving the consumer forward in 2011. But despite the potentially rosy outlook for U.S. consumers, land mines still lurk in the world economy. The European sovereign-debt crisis reared its ugly head again in the quarter as bond investors fretted over Ireland’s (and, to a lesser extent, Spain’s and Portugal’s) ability to pay its obligations. Although the European Union acted to shore up any short-term problems, the region is still growing at a slower pace than the rest of the world, and the debt hasn’t magically disappeared. It will be a long, hard slog to remedy the situation in Europe. P/E Ratio (trailing) Revenue Growth % 3 Yr EPS Dividend Yield ROE % Growth % % Current (trailing) 3 Yr 3M Company MMM Abbott Laboratories ABT AllianceBernstein Holding L.P. AB American Express Company AXP Applied Materials AMAT Avon Products AVP Cisco Systems, Inc. CSCO Colgate-Palmolive Company CL Credit Suisse Group ADR CS Eli Lilly and Company LLY Exelon Corporation EXC General Electric Company GE GlaxoSmithKline PLC ADR GSK Home Depot, Inc. HD HSBC Holdings PLC ADR HBC International Speedway Corporation A ISCA Johnson & Johnson JNJ Landstar System, Inc. LSTR Lockheed Martin Corporation LMT Lowe's Companies Inc. LOW Martin Marietta Materials MLM Medtronic, Inc. MDT Merck & Co Inc MRK Novartis AG ADR NVS Paychex, Inc. PAYX Diversified Industrials Drug Manufacturers - Major Asset Management Credit Services Semiconductor Equipment & Materials Household & Personal Products Communication Equipment Household & Personal Products Banks - Global Drug Manufacturers - Major Utilities - Diversified Diversified Industrials Drug Manufacturers - Major Home Improvement Stores Banks - Global Leisure Drug Manufacturers - Major Integrated Shipping & Logistics Aerospace & Defense Home Improvement Stores Building Materials Medical Devices Drug Manufacturers - Major Drug Manufacturers - Major Staffing & Outsourcing Services 62,043 73,921 2,438 52,243 18,667 12,845 113,571 38,513 48,438 40,360 27,740 194,768 101,872 57,867 180,843 1,278 172,520 2,028 25,162 34,721 4,234 40,159 111,035 135,636 11,353 5.66 3.05 1.49 3.11 0.70 1.50 1.36 4.28 — 4.36 3.95 0.92 1.54 1.85 2.65 1.00 4.87 1.64 7.41 1.35 1.74 2.90 2.60 4.35 1.36 15.27 15.70 15.65 13.81 20.08 19.38 14.84 18.80 — 8.03 10.54 15.92 16.23 19.23 19.27 26.18 12.71 25.06 9.76 18.55 52.08 12.79 13.85 13.48 22.68 0.29 11.03 -18.79 -0.41 -0.64 6.16 4.66 7.79 -4.86 11.65 3.42 1.07 6.87 -5.74 5.12 -4.60 5.10 -7.18 4.48 0.21 -8.06 8.75 6.61 9.46 1.97 -3.69 48.80 -22.18 -19.84 -16.45 11.01 4.37 21.11 -19.44 17.16 20.29 -20.37 4.62 -17.44 -37.46 -60.02 5.66 -10.80 10.29 -15.28 -28.79 5.00 40.66 6.67 -0.75 2.42 3.60 6.33 1.66 1.92 2.94 — 2.54 2.83 5.60 5.01 2.52 5.09 2.68 3.29 0.60 3.36 0.46 3.78 1.59 1.72 2.30 4.22 2.79 3.95 29.37 22.11 — 24.85 12.82 50.43 18.68 83.49 13.97 42.78 19.81 8.43 41.43 16.07 7.27 4.20 25.26 29.76 78.49 10.08 5.80 22.38 20.10 16.61 34.72 76 Morningstar Advisor February/March 2011

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2011

Morningstar Advisor - February/March 2011
Contents
Contributors
Letter From the Editor
First, Do No Harm
Do You Use Active or Passive Investment Strategies?
Best of Both Worlds
How to Build an Index
Accountable Investor
Nice Guys Finish First
Four Picks for the Present
Investment Briefs
A New Guardrail Against Risk
Tech Loosens the Purse Strings (a Bit)
It’s More About Costs Than Active or Passive
Play Your Stars
In Between Active and Passive
Selling Beta as Alpha
The Weighting Game, and Other Puzzles of Indexing
Leaving the Nest
Redefining Credit Risk
Another Vote for Market-Based Credit-Risk Measures
Big Opportunities in Small-Cap Stocks
Benchmarks? What Benchmarks?
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Slide, but Assets on the Rise
Indexing’s Lunatic Fringe

Morningstar Advisor - February/March 2011