Susan Dziubinski: I’m Susan Dziubinski with Morningstar. With the US stock market looking pricey and the economy on shaky ground, what’s a stock investor with some extra cash to do? Follow the advice of the longtime vice chairman of Berkshire Hathaway BRK.A BKR.B, Charlie Munger. Munger said that it’s better to buy the stocks of great companies at fair prices, rather than buying the stocks of fair companies at great prices.
So with that in mind, today we’re highlighting the stocks of three high-quality companies that aren’t screaming bargains, but that we think look fairly priced today. Now these companies share a few traits. First, they all earn wide economic moat ratings from Morningstar, which means we expect these companies to remain competitive for two decades or more. They also have medium or low Morningstar Uncertainty Ratings, which suggests that their cash flows are pretty predictable. And lastly, their management teams earn Exemplary capital allocation scores from Morningstar, which means they’ve done a phenomenal job of managing their balance sheets and shareholder returns, either through smart investments or distributions, or both. The stocks of these great companies trade around our fair value estimates, so in a pricey market, they’re stocks to buy.
3 Great Companies to Buy Trading at Fair Prices
The first great company trading at a fair price today is Amazon AMZN. Amazon has been disrupting the retail industry for more than two decades and has emerged as the leading infrastructure-as-a-service provider with Amazon Web Services. We think Amazon has carved out a wide economic moat that ties to four moat sources: network effects, cost advantages, intangible assets, and switching costs. We expect continued innovation to drive further share gains in e-commerce and technology advancements in AWS to maintain Amazon’s lead there. We assign Amazon’s stock a $245 fair value estimate.
Read Morningstar’s full report on Amazon.
The second great company trading at a fair price today is Northrop Grumman NOC. This diversified defense contractor has carved out a wide economic moat. Northrop boasts significant intangible assets due to its extreme product complexity and decades-long product cycles and contracts that effectively lock out alternative suppliers. The company also benefits from high switching costs. Combine all of that with a solid balance sheet, an exceptional rating on its investments, and a history of regular dividend increases, and you have a great company. We think Northrop Grumman’s stock is worth $630.
Read Morningstar’s full report on Northrop Grumman.
The final great company trading at a fair price today is U.S. Bancorp USB. One of the largest regional banks in the United States, US Bank is also one of the largest US issuers of credit cards and debit cards, one of the largest domestic merchant processors, and one of the largest corporate trust providers. We think the bank possesses a wide economic moat thanks to durable cost advantages and switching costs that are consistent with our bank moat framework. The bank’s balance sheet is sound, its acquisitions have added value, and US Bank is the highest-returning, most efficient franchise we cover. We think US Bank’s stock is worth $53.90.
Read Morningstar’s full report on U.S. Bancorp.
For more stock ideas, tune into The Morning Filter each week, wherever you get your podcasts. And visit Morningstar.com, too.
Morningstar senior analyst Dan Romanoff and analysts Maoyuan Chen and Nicolas Owens provided the research behind this segment.
Watch 3 Warren Buffett Stocks to Avoid Today for more from Susan Dziubinski.
