Morningstar Investment Management manages portfolios using similar investment strategies for clients as part of the Morningstar® Managed PortfoliosSM program. The Morningstar Managed Portfolios program is offered by the entities within Morningstar's Investment Management group, which includes subsidiaries of Morningstar, Inc. that are authorized in the appropriate jurisdiction to provide consulting or advisory services in North America, Europe, Asia, Australia, and Africa. In the United States, Morningstar Managed Portfolios are offered by Morningstar Investment Services LLC or Morningstar Investment Management LLC, both registered investment advisers, as part of a discretionary investment advisory service or as model portfolios to third-party advisory programs on a discretionary or non-discretionary basis. Portfolio construction and ongoing monitoring and maintenance of the portfolios within the Morningstar Managed Portfolios program is provided on Morningstar Investment Services' behalf by Morningstar Investment Management. In the United States, Morningstar Managed Portfolios are intended for citizens or legal residents of the United States or its territories and can only be offered by a registered investment adviser or investment adviser representative.
Performance for Morningstar Investment Management's related Tortoise and Hare strategies with a 100% equity target is presented on pages 22–23. The performance is derived from model portfolios seeded on Nov. 17, 2008 and managed by Morningstar Investment Management in a similar manner as client portfolios in these strategies (e.g., the timing of rebalancing and/or reallocation transactions is the same as when transactions are implemented for client portfolios.
Morningstar Investment Management does not guarantee the results of its advice or recommendations, or that the objectives of a strategy will be achieved. Morningstar's Tortoise and/or Hare portfolios and the portfolios offered by Morningstar Investment Services or Morningstar Investment Management may not have contained and/or may not currently contain the same underlying holdings and may have been and/or may currently be managed according to rules or restrictions established by Morningstar.
Opinions expressed are as of the current date and subject to change without notice. Morningstar, Inc. and Morningstar Investment Management shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use, which 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. This commentary is for informational purposes only and has not been tailored to suit any individual. References to specific securities or investment options should not be considered an offer to purchase or sell that specific investment.
Employees of Morningstar or its affiliates may have holdings in the stocks shown herein. All data presented is based on the most recent information available to Morningstar as of the date indicated and may not be an accurate reflection of current data. There is no assurance that the data will remain the same.
This commentary contains certain forward-looking statements. 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.
The performance shown herein should in no way be considered indicative of, or a guarantee of the actual or future performance of, or viewed as a substitute for any portfolio invested in a similar strategy. Performance data shown represents past performance which does not guarantee future results.
Performance shown for Morningstar's Tortoise and Hare portfolios on pages 6 and 12, and the gross-of-fees performance for the model portfolios managed by Morningstar Investment Management on pages 22 and 23, does not include the deduction of advisory fees or other expenses normally incurred in the management of a portfolio. Performance shown for Morningstar's portfolios does include the deduction of commissions. Reinvestment of all dividends and master limited partnership (MLP) distributions is assumed, although they may not be reinvested into the stock or unit that paid the dividend or distribution. The effects of taxation, other than foreign tax withholdings that may be applied to foreign stocks, are not taken into account. If these fees and expenses were included, the performance shown would be lower.
On pages 22–23, performance is shown for the model portfolios managed by Morningstar Investment Management in two additional ways. One includes an annual advisory fee of 0.55%, which is the maximum advisory fee that could be charged by Morningstar Investment Services for portfolios invested in the Tortoise and Hare strategies through its discretionary Morningstar® Managed PortfoliosSM program. The other includes an annual advisory fee of 1.65%, which includes Morningstar Investment Services' maximum annual fee plus a maximum annual advisory fee of 1.10% that could be charged by a financial advisor utilizing the Morningstar Managed Portfolios program with his or her clients.
Performance is based on a stock's market price as of the close of trading on the last business day of the month and is calculated using a time weighted, geometrically linked rate of return formula. Returns for periods longer than one year are annualized. Results achieved by an investor using a similar strategy may differ substantially from the historical performance shown herein, and may include the portfolio incurring a loss.
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.
Benchmark performance represents the return of an index consistent with the strategy's asset allocation and is provided as a reference only. Indexes are unmanaged and are not available for direct investment. The S&P 500 Index is a market capitalization-weighted index composed of the 500 most widely held stocks whose assets and/or revenues are based in the U.S. It is often used as a proxy for the U.S. stock market.
Tortoise and Hare Portfolios
Portfolio tables include a list of all holdings in the Morningstar Tortoise and Hare portfolios as of the date indicated. This information is subject to change at any time.
Featured Holdings sections display four holdings each from Morningstar's Tortoise and Hare portfolios, with a focus on holdings that have been purchased, added to, or trimmed within the last three months, holdings trading at relatively steep discounts to Morningstar, Inc.'s fair value estimates, and holdings that have been in the news within the last three months. Featured holdings are rotated on a regular basis with the intention that each holding will appear at least once per calendar year.
Roundups include a discussion of all trades made in Morningstar's Tortoise and Hare portfolios, plus a discussion of any major news events and earnings reports for the portfolios' current holdings since StockInvestor's last publication date.
Each Watchlist contains 80 companies that could potentially fit with the investment mandate of Morningstar's Tortoise or Hare portfolios. These may include companies with wide or narrow moats, positive or stable moat trends, and below-average price/fair value ratios according to Morningstar, Inc.'s analysts at the time the Watchlist is compiled. The Tortoise Watchlist may also include companies that Michael Corty believes have sustainable competitive advantages and strong balance sheets. The Hare Watchlist may also include companies that Matthew Coffina believes will deliver at least 10% annual earnings per share growth over the next three to five years. While each Watchlist excludes current portfolio holdings from the specified portfolio, it may contain current holdings from the other portfolio. Watchlists are compiled based on this analysis, and then narrowed to a list of 80 stocks by Matthew Coffina or Michael Corty. Watchlists are provided for informational purposes only. You should not assume that specific securities on the Watchlists are being considered for inclusion in Morningstar's Tortoise or Hare portfolios or will be profitable.
Stock Focus and Spotlights
The Stock Focus section contains Morningstar, Inc.'s analyses of several stocks that the editors believe may be of interest to StockInvestor subscribers. The Spotlight section includes recent investment research published by Morningstar, Inc. The contents of these sections have been previously published on Morningstar.com or Morningstar Select, and have been edited for length. Morningstar's analysis is provided for informational purposes only and is not investment advice or an offer to buy or sell a security. Morningstar Investment Management may have different opinions and has not independently verified the accuracy of the information published by Morningstar, Inc.
Securities identified in the Featured Holdings, Stock Focus, and Spotlight sections, to the extent they reflect holdings of Morningstar's Tortoise or Hare portfolios, do not include all of the securities purchased, sold, or recommended by Morningstar Investment Management for Morningstar's Tortoise and Hare portfolios. You should not assume securities in the Stock Focus and Spotlight sections were considered for inclusion in Morningstar's Tortoise and Hare portfolios. You should not assume that investments in the securities identified and discussed were or will be profitable.
Annual Dividend Per Share
Annual dividend per share is the annualized dividend expected to be paid to each share of common stock based on the company's most recently declared dividend rate.
Cumulative Total Returns
The cumulative total return graphs show the total percentage increase or decrease in the value of a portfolio or security over the specified time period.
Dividend Growth (%)
Dividend growth, as shown in the Stock Focus data tables, represents the Morningstar analyst's forecast for the compound annual growth rate in the company's per-share dividend for the upcoming four years, starting from the base year indicated.
Dividend Yield (%)
Dividend yield measures the annual dividend per share as a percentage of the stock price as of the date indicated.
Earnings Per Share
Earnings per share, or EPS, measures a company's net income divided by diluted shares outstanding. Earnings per share shown in the Stock Focus data tables represent the Morningstar analyst's estimate for the fiscal year indicated. These estimates are frequently on an adjusted (non-GAAP) basis.
EPS Growth (%)
Earnings per share growth, as shown in the Stock Focus data tables, represents the Morningstar analyst's forecast for the compound annual growth rate in the company's per-share profits for the upcoming four years, starting from the base year indicated. One of the important differences between earnings-per-share growth rates and net-income growth rates is that the former reflects the impact of net share repurchases and/or the dilution that occurs from new stock issuance and the exercise of employee stock options, warrants, or convertible securities.
Fair Value, Fair Value Estimates
The fair value estimate is a proprietary Morningstar data point that displays a Morningstar analyst's estimate of what a stock is worth. Each stock's fair value is estimated by utilizing a proprietary discounted cash flow model, or DCF. This model assumes that the stock's intrinsic value is equal to the total free cash flows the company is expected to generate in the future, discounted back to the present at a rate commensurate with the riskiness of the cash flows. As with any DCF model, the fair value estimate is highly sensitive to Morningstar's projections of future cash flows and other assumptions.
Fair Value Uncertainty
Fair value uncertainty is meant to give investors an idea of how tightly Morningstar analysts feel they can bound their fair value estimate for any given company. To assign uncertainty ratings, Morningstar analysts consider the company's economic sensitivity, operating leverage, and financial leverage, among other factors. Analysts classify stocks into one of the following uncertainty levels: Low, Medium, High, Very High, or Extreme. The greater the level of uncertainty, the greater the discount to fair value required before a stock can earn a 5-star rating, and the greater the premium to fair value before a stock earns a 1-star rating.
Free Cash Flow Per Share
Free cash flow per share is equal to operating cash flow minus capital spending, divided by diluted shares outstanding. Free cash flow represents the cash flow a company has left over after internal investments in its business. As shown in the Stock Focus data tables, free cash flow per share represents the Morningstar analyst's estimate for the fiscal year indicated.
FCF/Share Growth (%)
Free cash flow per share growth, as shown in the Stock Focus data tables, represents the Morningstar analyst's forecast for the compound annual growth rate in the company's per-share free cash flow over the upcoming four years, starting from the base year indicated.
Market Capitalization, Market Cap
Market capitalization is the total equity value of a company as determined by the market price of its outstanding common stock. It is calculated by multiplying the market price as of the close of trading on the date indicated by the number of shares outstanding as of the most recently reported fiscal quarter.
Moat trend is a proprietary Morningstar rating that reflects whether the underlying sources of a company's competitive advantage (or potential sources of advantage) are improving over time (positive moat trend), weakening over time (negative moat trend), or neither strengthening nor weakening (stable moat trend). A company may also have a negative moat trend if it faces a substantial competitive threat that is growing. Moat trend ratings tend to change more frequently than moat ratings.
The Morningstar Rating™ for Stocks is a forward-looking, analyst-driven measure of a stock's current price relative to the analyst's estimate of what the shares are worth. Stock star ratings indicate whether a stock, in the equity analyst's educated opinion, is cheap, expensive, or fairly priced. To rate a stock, an analyst estimates what he thinks it is worth (its "fair value"), using a detailed, long-term cash flow forecast for the company. A stock's star rating depends on whether its current market price is above or below the fair value estimate. Those stocks trading at large discounts to their fair values receive the highest ratings (4 or 5 stars). Stocks trading at large premiums to their fair values receive lower ratings (1 or 2 stars). A 3-star rating means the current stock price is fairly close to the analyst's fair value estimate.
Morningstar Style Box™
The Morningstar Style Box™ reveals a fund's investment strategy as of the date noted on this report. For equity funds, the vertical axis shows the market capitalization of the long stocks owned, and the horizontal axis shows the investment style (value, blend, or growth.) A darkened square in the style box indicates the weighted average style of the portfolio.
Operating Margin (%)
Operating margin is equal to a company's annual operating profit or loss divided by its annual sales. The figures shown in the Stock Focus data tables use Morningstar analyst estimates for the fiscal year indicated, with operating income frequently stated before nonrecurring charges.
Price/Fair Value Ratio, P/FV
The price/fair value ratio, or P/FV, is a stock's current price divided by the Morningstar analyst's fair value estimate. A portfolio's P/FV is equal to the weighted average of its stock holdings' price/fair value ratios. A P/FV ratio above 1 indicates that the Morningstar analyst believes a stock is overvalued, while a P/FV below 1 indicates that the Morningstar analyst believes the stock is undervalued.
The price/sales ratio is a stock's market capitalization divided by its annual revenue for the fiscal year indicated.
Return on Equity (%)
Return on equity is a company's annual net income divided by its average shareholders' equity. The figures shown in the Stock Focus data tables are based on Morningstar analyst estimates.
Return on Invested Capital (%)
Return on invested capital, as shown in the Stock Focus data tables, is the Morningstar analyst's estimate of a company's earnings before interest divided by its average invested capital. Invested capital includes operating assets such as inventory, accounts receivable, and property, plant, and equipment, less operating liabilities such as accounts payable and deferred taxes.
Revenue, as shown in the Stock Focus data tables, represents the Morningstar analyst's estimate of a company's sales in the fiscal year indicated.
Revenue Growth (%)
Revenue growth, as shown in the Stock Focus data tables, represents the Morningstar analyst's forecast for the compound annual growth rate in the company's revenue over the upcoming four years, starting from the base year indicated.
A sector is a company's general area of business. Morningstar divides stocks into 11 sectors according to their primary business, grouped into three larger super sectors. The communication services, energy, industrials, and technology sectors make up the sensitive super sector. Healthcare, consumer defensive, and utilities make up the defensive super sector. Basic materials, consumer cyclical, financial services, and real estate make up the cyclical super sector.
See Morningstar Rating™.
See Morningstar Style Box™.
Unless stated otherwise, total returns reflect investment performance without adjusting for sales charges (if applicable), advisory fees, or the effects of taxation. Total returns are adjusted to reflect all actual ongoing expenses (such as commissions and foreign withholding taxes) and assume reinvestment of applicable dividends and capital gains. Total returns for periods longer than one year are expressed in terms of compound annual averages, also known as geometric total returns. If adjusted for sales charges, advisory fees, and the effects of taxation, the performance quoted would be significantly reduced. Relative total returns, as shown on the back cover of the monthly newsletter, indicate how the combined Tortoise and Hare portfolios have performed relative to the S&P 500 over the time periods indicated.
See Fair Value Uncertainty.
See Dividend Yield.