Moat Stocks Stand Out in September

31 October 2019

September was a strong month for the Morningstar^®Wide Moat Focus Index^TM(“Moat Index”). It outperformed the S&P 500 Index by nearly two percent (3.79% vs. 1.87%, respectively), driven almost entirely by impressive stock selection.

Much of the positive return can be attributed to companies in the financial and information technology sectors. In particular, State Street Corp (STT) was the second best performing stock for the month and contributed to the strong performance of financials. Morningstar believes STT benefits from cost advantages in an industry where scale matters, as well as from high switching costs for clients that may wish to move custody to another bank. Information technology had several holdings with impressive returns, including Guidewire Software (GWRE) and Intel Corp. (INTC), which helped counterbalance Salesforce.com (CRM), September’s second worst performing stock. GWRE provides software to the property and casualty insurance industry and has been trading close to Morningstar’s fair value estimate in recent weeks, up markedly from its deep discount to fair value earlier this year.

Semiconductor companies such as INTC, Microchip Technology (MCHP), KLA-Tencor Corp. (KLAC) and Applied Materials (AMAT) have seen a large amount of price fluctuation over the past few months amidst the U.S.-China trade war, but they appear to be trending upward amid positive sentiment around the negotiations. Morningstar raised its fair value estimate for KLAC from $128 per share to $140 due to its leading position in the industry and high anticipated revenue.

The materials and energy sector exposure in the Moat Index posted notable performance, but did not contribute significantly to index return due to their low relative weightings. The sole materials company, Compass Minerals (CMP), and oil services company Core Laboratories (CLB) both posted double digit returns in September. CLB’s performance was particularly welcome in a month that saw its fair value downgraded from $67 per share to $59 by Morningstar.

Communication services was the only detracting sector, and its underperformance was modest. The sector’s performance was influenced most significantly by Facebook’s (FB) weak returns for the month.

Moat Index Outperformance Across Multiple Periods

As of 30/9/2019

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.

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