Not all undervalued stocks are ideas for investors to consider, let alone names for them to allocate capital to. Hence, the concept of value traps.
Conversely, there are times when volatile markets create valuation anomalies in high-quality equities. That’s happening today as some market observers believe that a variety of high-quality stocks are on sale, including some of the holdings in the VanEck Vectors Morningstar Wide Moat ETF (MOAT).
To its credit, MOAT, which follows the Morningstar Wide Moat Focus Index, is showing its mettle this year, outperforming the S&P 500 by more than 400 basis points. That’s a testament to embracing companies with wide moats — a quality attribute to be sure.
“During uncertain times, investors may want to own companies that offer some sense of certainty in terms of cash flows and company fundamentals,” noted Morningstar’s Susan Dziubinski.
The recently refreshed Morningstar’s Best Companies to Own list features 10 ideas for June, and more than half of the names on the list are among MOAT’s 52 holdings. Dow component and cloud computing behemoth Salesforce (NYSE:CRM) is one such name.
“Salesforce hasn’t been immune to the drubbing the technology sector has experienced this year. While the enterprise cloud computing solution provider likely faces a dip in revenue growth below 20% at some point in the next few years, we think ongoing margin expansion will provide compound earnings growth of more than 20% for much longer,” said Dziubinski.
Veeva Systems (NASDAQ:VEEV), a provider of cloud computing services to the life sciences industry — one of the growthier healthcare segments — is another MOAT holding on Morningstar’s list.
“We like the stock at this price, given the company’s strong retention rates, continued development of new applications, increasing penetration with existing customers, addition of new customers, and expansion opportunities outside of life sciences,” added Dziubinski, citing Morningstar analyst Dylan Finley.
Credit bureau Equifax (NYSE:EFX), Guidewire Software (NASDAQ:GWRE), ServiceNow (NYSE:NOW), and Tyler Technologies (NYSE:TYL) are the other MOAT holdings that could be names to consider in June, according to Morningstar. Adobe (NASDAQ:ADBE) is part of the group as well. While Adobe has competition in some lower-end segments, the company is still a wide moat name.
“Adobe stock is undervalued by about 32% after spending much of 2021 looking overvalued by our metrics. Adobe is a leader in content creation software thanks to its Photoshop and Illustrator solutions, both of which appear in the broader subscription-based Creative Cloud,” concluded Dziubinski.
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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.
