October was anything but scary for the Morningstar® Wide Moat Focus IndexSM (“Moat Index”). Its outperformance of the S&P 500 Index added to its strong 2019 relative performance and continued what has been an impressive several years for the Moat Index.
Outperformance Across the Board
Trailing Return (%) as of 10/31/2019
S&P 500 Index
Morningstar US Fund Large Blend Category Average
Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. For fund performance current to the most recent month-end, visit vaneck.com.
Strong Dose of Health Care Keeps Moat Index Alive and Well
The top three Moat Index performers in October were health care companies. By far the strongest of the bunch was Biogen (BIIB), whose stock price popped following the surprise announcement of the biotech firm’s intention to proceed with FDA submission of the Alzheimer drug aducanumab. Discontinuation of trials of the same drug in March caused a sell-off in Biogen, and it’s safe to say the news was welcomed by the market as Biogen posted a return of 28.3% for the month. On October 22, 2019, Morningstar raised its fair value estimate by $30 to $383, signaling its belief that the stock remains attractively priced despite its recent performance.
Information Technology Moat Stocks Chipping In
The information technology sector was the second leading contributor to Moat Index performance in October despite its underweight relative to the S&P 500 Index. Strong stock selection within the sector helped elevate its profile within the index during the month. Intel (INTC) led within the sector after issuing third quarter results that were well ahead of its guidance, raising the company’s stock to levels not seen since April of this year. Guidewire Software (GWRE) extended its strong performance into October after reporting strong fourth quarter results in September and despite weak guidance for the current quarter. GWRE has traded near or slightly above Morningstar’s fair value estimate throughout October.
Moat Index: A Few Tricks to Go with Mostly Treats
All told, over 70% of Moat Index constituents posted positive returns in October. There were, however, several detractors worth noting. Widely recognized consumer discretionary companies, Nike (NKE) and McDonald’s (MCD), both disappointed. Nike shares began to fall after its CEO transition announcement. Morningstar does not expect this transition to impact its wide moat rating or fair value estimate. McDonald’s fell following disappointing U.S. sales figures reported with its quarterly earnings results. Morningstar maintained its fair value estimate despite the results. It has stood at $215 per share since July of this year.
Energy was the sole detracting sector in the Moat Index with both of its stocks posting negative returns. However, its low absolute weighting muted its impact for the month.
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Fair value estimate: the Morningstar analyst's estimate of what a stock is worth
Price/Fair Value: ratio of a stock's trading price to its fair value estimate.
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The Morningstar® Wide Moat Focus IndexSM consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
S&P 500® Index: consists of 500 widely held common stocks covering the leading industries of the U.S. economy.
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