By Michael Brush
The odds are good that June 16 marked the stock market’s low, and we are in the early stages of a new bull market.
Inflation is rolling over. Supply chains are repairing. There is enough terror in the market to suggest we are near the bottom. I encourage you to increase stock exposure.
Playing armchair psychologist, that may be tough given the trauma you’ve experienced in this bear market in stocks /zigman2/quotes/210599714/realtime SPX -0.12% . To “trick” your mind into going along, consider focusing on “safe” names. These won’t go up much as speculative names. But they’re less likely to fall hard in the volatility and possible retest of June lows. It’ll mean you are less likely to get shaken out. Then plan purchases in three to five steps, to average in.
The big question: How to define “safe?” Outperforming managers offered their view in this column of mine .
One longstanding, go-to approach for me is to favor wide moat, five-star stocks at Morningstar Direct.
The wide moat suggests safety because moats tell us a company has competitive advantages — like superior brands and technology, trade secrets, and the bargaining power that comes from size. Companies with moats lose less business when downturns happen. They take market share.
The five-star rating implies safety because since it trades far below Morningstar’s conservative discounted cash flow valuation. The discount tells us a lot of the damage has been done. Other investors notice this, which suggests some price support as they buy.
Morningstar Direct is allowing me to share its complete list of wide moat, five-star stocks. I’ll then single out five favorites that offer cyclicality and potential market beta to enhance upside in a market recovery.
|Company||Ticker||Sector||Recent price||Moat rating||Stock Rating|
|Anheuser-Busch InBev||BUD||Consumer Defensive||$54.41||Wide||5|
|ASML Holding NV||ASML||Technology||$542.27||Wide||5|
|Comcast Corp||CMCSA||Communication Services||$42.27||Wide||5|
|Compass Minerals International Inc.||CMP||Basic Materials||$34.53||Wide||5|
|Etsy Inc.||ETSY||Consumer Cyclical||$96.87||Wide||5|
|Guidewire Software Inc.||GWRE||Technology||$77.20||Wide||5|
|Imperial Brands PLC||IMBBY||Consumer Defensive||$22.50||Wide||5|
|JD.com Inc.||JD||Consumer Cyclical||$64.01||Wide||5|
|MercadoLibre Inc.||MELI||Consumer Cyclical||$789.20||Wide||5|
|Meta Platforms Inc.||META||Communication Services||$183.17||Wide||5|
|Roche Holding AG||RHHBY||Healthcare||$41.96||Wide||5|
|Taiwan Semiconductor Manufacturing Co Ltd||TSM||Technology||$87.79||Wide||5|
|Tencent Holdings Ltd||TCEHY||Communication Services||$43.16||Wide||5|
|The Walt Disney Co||DIS||Communication Services||$104.18||Wide||5|
|Tyler Technologies Inc.||TYL||Technology||$370.97||Wide||5|
|Yum China Holdings Inc.||YUMC||Consumer Cyclical||$47.27||Wide||5|
|Zimmer Biomet Holdings Inc.||ZBH||Healthcare||$108.45||Wide||5|
|Source: Morningstar Direct|
You can choose what you want from the Morningstar list, but I’d go light on traditional defensive names like Anheuser-Busch InBev /zigman2/quotes/209225053/composite BUD +1.04% , Comcast /zigman2/quotes/209472081/composite CMCSA -1.16% , and Imperial Brands /zigman2/quotes/206232937/delayed IMBBY +0.47% /zigman2/quotes/208789104/delayed UK:IMB +0.43% . They’re less likely to give you outsized upside when the “risk on” mentality returns as worries about inflation and recession ease and markets recover.
3 tech names
I’d like to own a lot of quality tech going into the next phase of the bull market. Tech has been heavily discounted because it is cyclical. By the same token, tech should post above-average returns as concerns about the mid-cycle economic slowdown ease.
I was a big fan of Meta /zigman2/quotes/205064656/composite META +2.53% back when it sold off after its initial public offering, trading down to the low $20s. I sold too soon, but earlier this year I was buying back in the weakness. We won’t get the same gains again, of course. But Meta seems too heavily discounted.
The moat: Meta is the largest social network in the world, with over 3.6 billion monthly active users on its apps, which include Instagram, Messenger, and WhatsApp. This creates a network effect, a good source of moat power. The more people join a network, the more valuable it is for everyone.
Facebook also has proprietary consumer data, which makes it a superior platform for advertisers. So it’ll post outsized gains as advertisers continue to migrate online. That’s a mega trend that’ll help you as a Meta shareholder.
Investors are worried about the transition to the metaverse. But they had similar fears about whether Mark Zuckerberg could manage the transition to smartphones in the late 2000s. That worked out OK.