One benefit of a turbulent January for equities is that some stocks, including familiar names investors would love to embrace, are now trading at more attractive multiples.
In fact, a surprising source of some of those now-compelling valuations is the VanEck Vectors Morningstar Wide Moat ETF (MOAT). By following the Morningstar Wide Moat Focus Index, MOAT makes it easy for investors to access a basket of attractively valued companies with stout competitive advantages.
Not only are some MOAT member firms currently discounted, but the ETF is holding up better than the broader market to start 2022.
“In our 2022 U.S. Market Outlook, we highlighted the better relative valuation of companies with wide economic moats compared with those with narrow or no moat at all. Year-to-date, the Morningstar Wide Moat Focused Index has only declined 3.66%,” says Morningstar analyst Dave Sekera.
MOAT holds just 46 stocks, indicating that there’s a high bar to entry and that the combination of wide moats at discounted valuations is often elusive. The exclusivity found in MOAT is alluring, but there’s more substance to the fund’s story, including the propensity of wide moat stocks to be durable as inflation rises. That’s a point to ponder today because inflation shows little sign of relenting over the near term.
“In addition to the better relative value, we also opined that these stocks will hold up better in an inflationary environment. Wide Moat companies typically will exhibit better pricing power, and have the ability to pass through their own cost increases to their customers. As such, they will be able to maintain margins if inflation remains more persistent than we currently forecast and thus hold their valuations,” adds Sekera.
At the end of 2021, MOAT allocated 42% of its weight to the technology and healthcare sectors, which are two groups with pricing power. The ETF’s fourth-largest sector weight is consumer staples at 14.1%, a notable trait because that sector also has pricing power and inflation-fighting credentials.
Among MOAT holdings that are now attractively valued, Sekera highlights Alphabet (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Meta (NASDAQ:FB), Microsoft (NASDAQ:MSFT), and Salesforce.com (NYSE:CRM). Those stocks combine for nearly 12% of the ETF’s weight.
“Yet, with the downturn in large-cap growth stocks, we note that there is now a rare opportunity to trade up in quality to large cap and growth stocks of companies with wide economic moats,” 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.
