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.

Aug 30, 2016
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Matthew Coffina, CFA
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, 8/26/16 -- New Fair Value Estimate for Enterprise Products Partners

StockInvestorSM focuses on the activities of portfolios of Morningstar, Inc. that are invested in accordance with the Tortoise and Hare strategies. These portfolios are managed by Morningstar Investment Management LLC, a registered investment adviser, which manages other client portfolios using these strategies.

This week's Morningstar analyst notes cover a transfer of Morningstar analyst coverage for Enterprise Products Partners EPD and a change in its fair value estimate, along with a note about crude-market fundamentals that's relevant to Magellan Midstream Partners MMP.

Lowering FVE for Enterprise Products Partners as We Transfer Coverage
by Preston Caldwell | 08-25-16

As we transfer coverage of Enterprise Products Partners to a new analyst, we are revising our outlook to reflect recent operating results as well as more tempered long-term expectations.

While results for the natural gas liquids and natural gas segments have largely fallen in line with our expectations, we have overestimated the positive uplift provided by the crude oil pipelines and services segment. Gross margins in this segment for the first six months of 2016 ($380 million) are below the pace necessary to reach our prior full-year estimate of about $1,200 million. The chief cause of this underperformance is lower-than-expected takeaway volumes, most notably from pipelines servicing the Eagle Ford. We expect this weakness to persist, and as such, we are reducing our expectations. Also, as EPD retains some locational basis price risk via its marketing division (as opposed to contracting all available volumes), it has been harmed as price differentials have narrowed. Thus, we are incorporating a downward shift in near-term margins per barrel. These adjustments remove about $3 per unit in value.

Additionally, we are lowering our long-term (2021-30) expectations. Our expected EBI growth rate is now 100 basis points lower at 7%, putting it more in line with narrow-moat pipeline peers in terms of economic profits expected to be generated during that period. While we expect reasonably strong NGL asset economics to lift EPD for years to come, we do not want to extrapolate the unprecedentedly strong NGL asset economics of recent years.

As a result of these adjustments, we're reducing our fair value estimate to $26 per unit from $32.

Crude-Market Fundamentals Continue to Tighten, but the Recovery Still Has a Ways to Go
by Stephen Simko, CFA | 08-23-16

Crude markets have tightened a good deal in recent months, as strong oil demand growth and supply issues have pulled forward the industry recovery by about a year compared with the outlook we published in April. Even so, 2017 fundamentals are far from robust from an oil price perspective, and don't appear supportive of prices moving much above the $50 per barrel threshold. Another large uptick in rig additions in the U.S. could be enough to eliminate near-term inventory draws altogether, which is the last thing oil markets need for a sustained price recovery to occur. With this in mind, we are setting our 2017 price forecast for West Texas Intermediate at $50 per barrel, which we believe is sufficient to prevent any further net shale activity increases in the coming quarters.

Stronger fundamentals look set to emerge in 2018. The root cause of potential supply shortages in the medium term is the major cuts in upstream capital expenditures during the past two years. As a result of low investment levels, capacity additions outside of shale are about to fall dramatically after 2017. Further, OPEC will have little spare capacity, as the cartel has also been cutting back on oilfield spending.

The industry is thus setting itself up to have few options to meet incremental supply needs besides U.S. tight oil in 2018-19. What some have suspected for some time is now looking likely: tight oil is set to become the key swing supplier for global crude markets.

Because of improving fundamentals being pulled in by about a year, we are raising our 2018 WTI oil price forecast to $65 from $52.50, which we believe is the level sufficient to drive a major increase in U.S. tight oil activity. However, we continue to believe that U.S. shale will overheat eventually in a high price environment. As a result, we’re lowering our 2019 WTI oil price forecast to $60 from $65. Our midcycle price outlook of $55 is unchanged.

We will be publishing updated reports and valuations this week.


©2016 Morningstar, Inc. All rights reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. The information contained in this document is the proprietary material of Morningstar, Inc. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, Inc., is prohibited. All data presented is based on the most recent information available to Morningstar, Inc. as of the release date and may or may not be an accurate reflection of current data.  There is no assurance that the data will remain the same.

The commentary, analysis, references to, and performance information contained within Morningstar® StockInvestorSM, except where explicitly noted, reflects that of portfolios owned by Morningstar, Inc. that are invested in accordance with the Tortoise and Hare strategies managed by Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc. References to “Morningstar” refer to Morningstar, Inc.

Opinions expressed are as of the current date and are subject to change without notice. Morningstar, Inc. and Morningstar Investment Management LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only and has not been tailored to suit any individual.

The information, data, analyses, and opinions presented herein do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Please note that references to specific securities or other investment options within this piece should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment.

This commentary contains certain forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

Investments in securities are subject to investment risk, including possible loss of principal.  Prices of securities may fluctuate from time to time and may even become valueless.  Securities in this report are not FDIC-insured, may lose value, and are not guaranteed by a bank or other financial institution. Before making any investment decision, investors should read and consider all the relevant investment product information. Investors should seriously consider if the investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision. There can be no assurance that any financial strategy will be successful.

Common stocks are typically subject to greater fluctuations in market value than other asset classes as a result of factors such as a company’s business performance, investor perceptions, stock market trends and general economic conditions.

All Morningstar Stock Analyst Notes were published by Morningstar, Inc. The Weekly Roundup contains all Analyst Notes that relate to holdings in Morningstar, Inc.’s Tortoise and Hare Portfolios.

David Harrell may own stocks from the Tortoise and Hare Portfolios in his personal accounts.

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