Investment Strategy

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Investment Strategy
What is the goal of the Tortoise Portfolio? The Tortoise Portfolio aims to outperform the S&P 500 index over time. Companies in this portfolio tend to be mature, relatively slow-growing, and with moderate to low risk. New purchases must have an economic moat, preferably wide. We attempt to tilt the portfolio toward companies with at least stable competitive advantages (stable moat trends).

What is the goal of the Hare Portfolio? The Hare Portfolio aims to outperform the S&P 500 index over time. Companies in this portfolio tend to be faster-growing, with both higher risk and higher return potential than those in the Tortoise. New purchases must have an economic moat, preferably wide. We attempt to tilt the portfolio toward companies with growing competitive advantages (positive moat trends).

Investment Strategy
Morningstar StockInvestor invests in companies with established competitive advantages and generous free cash flows, trading at discounts to their intrinsic values. These are core holdings, with more conservative ideas appearing in the Tortoise Portfolio and more aggressive ideas in the Hare Portfolio. We expect both portfolios to beat broad U.S. stock index benchmarks, such as the S&P 500, over rolling three-year periods.
About the Editor
As editor of Morningstar's StockInvestor newsletter, Matthew Coffina manages the publication's two real-money, market-beating model portfolios — the Tortoise and the Hare. Matt was previously a senior healthcare analyst, covering managed care and pharmaceutical services companies. Matt also developed the discounted cash flow model used by Morningstar analysts to assign fair value estimates to most of the companies in its global coverage universe.

Matt joined Morningstar in 2007. He holds a bachelor's degree in economics from Oberlin College and also holds the Chartered Financial Analyst (CFA) designation.

 
Jul 03, 2015
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Matthew Coffina, CFA
Editor,
Morningstar StockInvestor
As editor of Morningstar's StockInvestor newsletter, Matthew Coffina manages the publication's two real-money, market-beating model portfolios -- the Tortoise and the Hare. Matt was previously a senior healthcare analyst, covering managed care and
Featured Posts
Roundup, 7/2/15 -- EBay Acquires Money Transfer Service

I discussed the financial standoff in Greece in a separate alert on Monday, which you can find on our website: http://msi.morningstar.com/. The Greek government and its creditors continued to trade proposals and accusations throughout the week, but the situation is pretty much on hold pending the results of Sunday's referendum on accepting Europe's bailout terms. I'm wondering if we're already past the point of no return: If Greek banks re-open with euros in their accounts, wouldn't any rational person withdraw their deposits as soon as possible? I'll be keeping an eye on developments in Greece, but I have no plans to alter our investment strategy in response.

The only other news of note came from eBay's EBAY PayPal segment, which agreed to acquire digital money transfer service Xoom. Remittances are a huge global market, and I see lots of room for low-cost digital providers to steal market share from traditional money transfer firms like Western Union WU. (Western Union's negative moat trend was the main reason I sold the Hare's stake back in 2013.) The acquisition is too small to alter eBay's $61 fair value estimate, but we expect strategic benefits including PayPal's ability to leverage fixed costs and expand Xoom's geographic presence. I plan to hold eBay at least through the PayPal spinoff.

Happy 4th of July! My family's planning a little camping trip--it's always nice to get out of the city for a long summer weekend.

Regards,

Matt Coffina, CFA
Editor, Morningstar StockInvestor

Email: matthew.coffina@morningstar.com

Disclosure: I own all of the stocks in the Tortoise and Hare in my personal portfolio.

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Morningstar Stock Analyst Note

EBay EBAY  |  R.J. Hottovy, CFA

We have a positive take on PayPal's $890 million acquisition of digital money transfer provider Xoom, as it not only complements the company's current product offerings and fills some holes in its geographic footprint, but also solidifies the network effect underpinning PayPal's wide moat as it heads toward the separation from eBay later this month. With $6.8 billion in gross sending volume last year, Xoom is among the leading players in the highly fragmented $583 billion remittance market (using World Bank statistics). Based on its successful marketing tactics with immigrants worldwide, vast payment processing capabilities, broad distribution network of banks, and real-time risk management tools, we believe Xoom was already positioned to outgrow the market's expected mid-single-digit growth trajectory the next several years, which should now accelerate given the synergies with PayPal.

The acquisition isn't significant enough to move the needle on our $61 fair value estimate for eBay or our stand-alone $33 fair value estimate for PayPal, but we still view the transaction as strategically important for three reasons. First, with 60% of Xoom transactions taking place on a mobile device, it bolsters PayPal's existing peer-to-peer mobile payment platforms such as Venmo--a key area of growth post-separation--while offering new payment services such as cross-border bill pay. Second, it increases PayPal's presence in a number of rapidly growing disposable income markets such as China, India, Brazil, and Mexico. We view this as meaningful from not only an addressable market and cross-marketing standpoint, but also because cross-border transactions tend to carry higher margins due to foreign exchange fees. Lastly, it adds 1.3 million Xoom users to the PayPal network--we estimate only minimal overlap between existing customer bases--most of which fund transactions (90%-plus) with bank accounts, a more margin-accretive funding source compared with credit cards.

Our valuation for PayPal is based on midteens payment volume growth (with increasing contribution from mobile transactions), low- to mid-teens revenue growth (which factors in a modest deceleration in take rates as the company attracts a wider number of large merchants), and gradual segment margin expansion to the mid-20s over the next five years as current infrastructure, technology, and marketing efforts taper down. Merchant Services and PayPal Credit are likely to be the primary growth engines for this segment, particularly as eBay expands its merchant base and broadens its mobile offerings.

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Morningstar Investment Services

Interested in investing in the Tortoise and Hare portfolios? Now you can! Morningstar Investment Services, Inc. now offers customizable portfolios patterned after the Morningstar StockInvestor portfolios. Call 866-765-0663 to learn more.

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