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  • Moat Investing

    Moat Index: Lithium Surprise Powers Compass Minerals

    Brandon Rakszawski, Senior ETF Product Manager
    August 09, 2021
     

    Long-time Morningstar Wide Moat Focus Index (the “Moat Index” or “Index”) component Compass Minerals (CMP) received its fair share of attention in July after announcing the identification of a lithium brine resource with approximately 2.4 million metric tons of lithium carbonate equivalent at its active Ogden, UT solar evaporation site. CMP’s management is exploring strategic options for the lithium, and Morningstar’s base case assumes CMP will partner with another company on the project and pursue direct lithium extraction technology to produce lithium as a byproduct from its brine resources.

    This news preceded a boost that lithium producer stocks received in late July, following the news that the U.S. infrastructure bill was advancing in the Senate. The bill features $7.5 billion of funds that would be used to build 500,000 high-powered electric vehicle chargers throughout the country, according to Morningstar. Morningstar had already incorporated this information into their lithium price assumptions and ultimately increased CMP’s fair value estimate from $78 to $88 per share earlier in July. Despite the rally, CMP shares remained notably undervalued at the end of the month, according to Morningstar.

    July Performance Contributors and Detractors in Moat Index

    The Moat Index modestly underperformed the S&P 500® Index in July (1.99% vs. 2.38%, respectively). However, the Index remained ahead of the S&P 500 Index by over 4.0% year to date through July (22.16% vs. 17.99%, respectively).

    Outside of Compass Minerals’ strong month, several Moat Index constituents also stood out. Alphabet Inc. (GOOGL) was added to the Index in both December 2020 and March 2021 at what were attractive valuations. Since that point Morningstar has increased GOOGL’s fair value estimate to $2,955 and $3,200 in April and July, respectively. Shares remained roughly 15% undervalued at the end of July, according to Morningstar.

    Pfizer Inc. (PFE) was another standout in July. The company reported strong second quarter results ahead of Morningstar’s expectations, buoyed by exceptionally strong COVID-19 vaccine sales as well as solid growth from the core portfolio. Additionally, Morningstar increased its fair value estimate to $42 per share from $40 based on the strong traction Pfizer is showing coming out of the pandemic midway through 2021, with currently marketed drugs as well as pipeline advancements.

    Blackbaud Inc. (BLKB) slid following a strong June for the company’s share price. As a software company, it contributed to poor stock selection as a whole within the information technology sector in July. Poor stock selection paired with modest sector allocation effect made the tech sector the leading detractor to relative performance versus the S&P 500 Index.

    Biogen Inc. (BIIB) was another notable detractor as the company came back to earth following the June surprise FDA approval of its Alzheimer therapy. The headlines focused on the recent approval and controversy that surrounded it, but also notable was the company’s 25% decline in second quarter multiple sclerosis revenue. Despite this decline, Morningstar noted that Biogen's core MS business and expansion into depression, stroke and neurogenerative diseases support a wide moat, and Morningstar maintained its $391 fair value estimate for the company.

    A Note on Cerner’s Moat

    Though generally a rare occurrence, from time to time one of the Moat Index’s constituents will see its moat rating drop a notch to narrow. This time Cerner Corp. was downgraded. In late June, Morningstar cited strong switching costs associated with government contracts, but a lack of moat sources in their strategic growth areas such as Software as a Service and data reduced Morningstar’s confidence in the duration of Cerner’s moat. Without a wide moat rating, Cerner can be expected to be removed from the Moat Index in future reviews.

    VanEck Vectors Morningstar Wide ETF (MOAT) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.

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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, are valid as of the date of this communication and subject to change without notice. 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. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    This commentary is not intended as a recommendation to buy or to sell any of the sectors or securities mentioned herein. Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/etf/equity/moat/holdings/.

    An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.

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    Price/Fair Value: ratio of a stock's trading price to its fair value estimate.

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  • Authored by

    Brandon Rakszawski
    Senior ETF Product Manager

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