From Morningstar:

Investing in companies with durable competitive advantages has led to strong returns in the past year. Morningstar analysts suggest that combining a moat with an undervalued stock is a key to outperformance. The Morningstar Wide Moat Focus Index, which includes low-priced US companies with long-lasting competitive advantages, has returned twice as much as the US Market Index over the past 20 years. The Magnificent Seven stocks, aside from Tesla, have wide moats and have performed very well over the past year. Wide-moat stocks have outperformed narrow-moat and no-moat stocks, gaining more than the overall US market.

Despite underperforming the market over the past year, undervalued wide-moat stocks have significantly outperformed the broader market over the past 20 years. Stocks with durable competitive advantages are expected to continue to generate high returns for years. Companies with wide economic moats are expected to maintain their competitive advantages for more than 20 years and have outperformed the market historically. When looking at the moat, it reflects the degree to which a company has durable competitive advantages and can fend off competition for years. Only 12% of companies in the US Market Index have a wide moat rating.

Buying stocks at an attractive valuation is crucial for meaningful long-term returns, no matter how high quality the company. Stocks with moats are also less volatile than those without moats, and they have traditionally seen smaller price swings. Companies with durable competitive advantages are considered to have high-quality, stable stock prices. High-quality stocks with moats tend to outperform in downcycles and underperform in upcycles, ultimately resulting in long-term outperformance.

The Wide Moat Focus Index’s top contributors come from various sectors, including technology, healthcare, financial services, industrials, and consumer defensives, with the semiconductor equipment supplier Applied Materials and liquified natural gas company Cheniere Energy leading returns over the past five years. These returns have contributed to the long-term outperformance of undervalued wide-moat stocks. Meanwhile, the Magnificent Seven stocks have performed very well over the past year, illustrating the success of combining high-quality companies with attractive valuations.



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