07 January 2020
VanEck Blogs | Moat Investing
The Moat Stocks that Powered 2019 Outperformance

2019 was an impressive capstone to an equally impressive decade for the Morningstar® Wide Moat Focus IndexSM (“Moat Index”). Superior stock selection was the theme of the year, with KLA Corp. (KLAC), Applied Materials Inc. (AMAT) and Facebook (FB) being the top contributors to Moat Index performance. Each company benefits from sustainable competitive advantages according to Morningstar equity analysts, and the Moat Index allocated to these companies at attractive entry points based on their market price relative to Morningstar’s assessment of fair value. The Moat Index finished the year ahead of the S&P 500 Index by more than four percent (35.65% vs. 31.49%, respectively) and led in all standard trailing periods for the decade.

Decade of Outperformance

Trailing Return (%) as of 12/31/2019

  1 Yr 3 Yr 5 Yr 10 Yr
Moat Index 35.65 18.57 14.32 15.03
S&P 500 Index 31.49 15.27 11.70 13.56
Morningstar US Fund Large Blend Category Average 28.57 13.24 9.51 11.47

All Systems Are Go for This Semiconductor Moat Stock

KLA Corp. may not be a household name, but it is a powerhouse in the semiconductor industry. According to Morningstar, its portfolio process, diagnostics and control tools combined with its leading technical expertise allow KLAC products to be in every major chip manufacturing facility in the world.

2010 was the last time KLAC was present in the Moat Index. At the time it traded at a steep discount to Morningstar’s fair value estimate but has since traded mostly at or above fair value until a buying opportunity presented itself. KLAC was first added to the Moat Index in September 2018 and its weighting was subsequently increased in December 2018. The discount to fair value has since eroded, and KLAC ended the year trading above Morningstar’s fair value estimate.

KLAC’s position was scaled back in September 2019 allowing the Moat Index to lock in much of the gains during that period.

KLA Corp (KLAC)

Price and Fair Value of 1/1/19 - 12/31/19

MOAT_KLAC_2020.01.png

Source: Morningstar. Past performance is no guarantee of future results. For illustrative purposes only. Not a recommendation to buy or sell any security. Visit vaneck.com to view daily ETF and index holdings.

Another Semiconductor Moat Stock Chipping In

Another member of the semiconductor industry, Applied Materials, followed a similar near-term allocation pattern in the Moat Index. AMAT supplies semiconductor manufacturing equipment and benefits from intangible assets related to its equipment design expertise and R&D cost advantages, according to Morningstar. Major chipmakers typically develop strong relationships with their equipment company that span multiple steps of their chip production process. In short, AMAT’s materials engineering solutions are involved in making nearly every chip in the world.

As the semiconductor industry struggled through the second half of 2018, AMAT presented an attractive entry point relative to Morningstar’s fair value estimate. It was added to the Moat Index in September 2018 and December 2018 at steep discounts to fair value, particularly in December 2018 when AMAT was trading at less than 70% of Morningstar’s fair value estimate. The Moat Index pared back its AMAT weighting in September 2019, and the stock finished 2019 near fair value, according to Morningstar. Unlike KLAC, AMAT has been a frequent member of the Moat Index, making five separate appearances including one that lasted nearly four years.

Applied Materials Inc. (AMAT)

Price and Fair Value of 1/1/19 - 12/31/19

MOAT_AMAT_2020.01.png

Source: Morningstar. Past performance is no guarantee of future results. For illustrative purposes only. Not a recommendation to buy or sell any security. Visit vaneck.com to view daily ETF and index holdings.

Do You Like This Moat Stock Now?

I’ve written about Facebook before and for good reason: it was the top contributing company to Moat Index returns for the decade. Morningstar assigned Facebook a wide economic moat rating out of the gate when it went public in May 2012 and cites its network effect around its massive user base and intangible assets related to user data.

While FB’s stock price has certainly trended up since its IPO, it hasn’t been without volatility. The key to the Moat Index’s allocations to FB has been its focus on valuations. Each instance of exposure to FB in the Moat Index began with attractive valuations and ultimately concluded with outperformance of the broad market.

Date Included

Date Removed Facebook Inc. Total Return (%) S&P 500 Index Total Return (%)
9/24/2012 12/21/2012 14.87 -1.44  
6/24/2013 9/20/2013 93.60 7.95
9/24/2018 N/A* 25.97 13.13
12/24/2018 N/A* 64.27 36.46



*Facebook was added to the U.S. Moat Index in September 2018 and its position was subsequently increased at the December 2018 review. It remains in the index and returns are for these positions are displayed though December, 31, 2019. Source: Morningstar. Past performance is no guarantee of future results. For illustrative purposes only. Not a recommendation to buy or sell any security. Visit vaneck.com to view daily ETF and index holdings.

While not all companies contribute to Moat Index returns the way these three tech companies have in 2019, far more have contributed positively than have detracted from performance. Information technology was the top contributing sector to both Moat Index performance and that of the broad U.S. equity markets for the year. But other sectors also stood out in the Moat Index such as health care, consumer staples and financials. Even smaller sectors such as materials contributed meaningfully to its performance during the year, far more so than in the broad market.

Top and Bottom Contributors to 2019 Moat Index Return (%)

Top 10

Bottom 10

Name

Ticker

Contribution

Name

Ticker

Contribution

KLA Corp

KLAC

2.16

Core Laboratories

CLB

-0.66

Applied Materials Inc

AMAT

1.72

Cheniere Energy Inc

LNG

-0.21

Facebook Inc

FB

1.28

Veeva Systems Inc

VEEV

-0.13

The Western Union Co

WU

1.27

Pfizer Inc

PFE

-0.07

Microchip Technology Inc

MCHP

1.17

Harley-Davidson Inc

HOG

0.09

Campbell Soup Co

CPB

1.17

Cerner Corp

CERN

0.12

Compass Minerals International

CMP

1.12

John Wiley & Sons Inc

JWA

0.13

General Mills Inc

GIS

1.12

Berkshire Hathaway Inc

BRKB

0.14

Zimmer Biomet Holdings Inc

ZBH

1.08

Merck & Co Inc

MRK

0.14

State Street Corporation

STT

1.00

General Dynamics Corp

GD

0.15

Source: Morningstar. Past performance is no guarantee of future results. For illustrative purposes only. Not a recommendation to buy or sell any security. Visit vaneck.com to view daily ETF and index holdings.

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The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Van Eck Associates Corporation or its subsidiaries to participate in any transactions in any companies mentioned herein. This content is published in the United States. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed herein.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

Brandon
Brandon Rakszawski
Senior ETF Product Manager