The S&P 500 slumped last week, taking its losing streak to five straight weeks and marking the worst such run since 2011.
Equity investors are understandably rattled, and with bonds sinking amid rising interest rates, it feels as though there aren’t many refuges aside from cash. While these are undoubtedly trying times, one positive is that valuations on some high-quality stocks are increasingly attractive.
Some names in that camp sport the alluring wide moat designation and reside in the popular VanEck Vectors Morningstar Wide Moat ETF (MOAT). MOAT, which follows the Morningstar Wide Moat Focus Index, isn’t immune to 2022 market weakness, but broad-based selling could be unearthing opportunity with some wide moat names.
“Stocks for all types of companies have declined, even including those with the strongest long-term durable competitive advantages. For example, the Morningstar US Wide Moat Index has declined 15.81%. However, valuation has played a key role in limiting the downside,” notes Morningstar analyst Dave Sekera.
The $6.8 billion MOAT holds 52 stocks, and owing to the fact that wide moat investing is sector agnostic, the VanEck exchange trade fund is overweight to some sectors with defensive traits. For example, the fund devotes a combined 29% of its weight to healthcare and consumer staples equities.
The healthcare sector, though not fully immune to broader market declines, currently offers defensive traits. Consumer staples, one of this year’s best-performing sectors, offers an alluring combination of above-average dividend yields, consistent payout growth, and pricing power, which is relevant as inflation continues running hot.
Add to that, the Morningstar Wide Moat Focus Index is proving better than the broader market this year.
“Whereas this index contains all the stocks we rate with a wide economic moat, the Morningstar Wide Moat Focus Index is comprised of the 40 stocks with the lowest price/fair value ratio. Compared to the Wide Moat Index, the Wide Moat Focus Index had only dropped 9.11%,” adds Sekera.
Among the large-cap, wide moat stocks that are residing at attractive valuations today are, in alphabetical order, Adobe (NASDAQ:ADBE), Amazon (NASDAQ:AMZN), Boeing (NYSE:BA), Emerson Electric (NYSE:EMR), Gilead Sciences (NASDAQ:GILD), Intel (NASDAQ:INTC), and Salesforce.com (NYSE:CRM). Those names combine for about 14% of MOAT’s weight.
Some previous high-flying growth stocks, including Google parent Alphabet (NASDAQ:GOOG) and Meta Platforms (NASDAQ:FB), are undervalued today. Both are MOAT holdings.
“Both are significantly undervalued and skew the valuation of the index downward. There are also a significant number of stocks in the traditional communications and media sectors that are undervalued,” concludes Sekera.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
