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Tortoise Portfolio. The objective of Morningstar, Inc.’s Tortoise Portfolio is to focus on “high-quality” businesses, defined as having both durable competitive advantages and strong balance sheets. These are often well-established market leaders with economic moats (preferably wide). Morningstar’s aim for the portfolio is to generate risk-adjusted returns that outperform the S&P 500 over a full market cycle.

Hare Portfolio. The objective of Morningstar, Inc.’s Hare Portfolio is to seek long-term capital appreciation ahead of the S&P 500 Index, focusing on companies with strong and growing competitive advantages. Morningstar is willing for the Hare to accept greater risk in exchange for higher total return potential.

About the Editor
David Harrell is the editor of the Morningstar StockInvestor, a monthly newsletter that focuses on a wide-moat stock investing strategy. For illustration purposes, issues highlight activities pertaining to Morningstar, Inc. portfolios invested in accordance with a strategy that seeks to focus on companies with stable or growing competitive advantages. David served in several senior research and product development roles and was part of the editorial team that created and launched He was the co-inventor of Morningstar's first investment advice software.

David joined Morningstar in 1994. He holds a bachelor's degree in biology from Skidmore College and a master's degree in biology from the University of Illinois at Springfield.

Our Portfolio Managers

Matthew Coffina, CFA, is the portfolio manager for Morningstar Investment Management LLC’s Hare strategy. 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.

Michael Corty, CFA, is the portfolio manager for Morningstar Investment Management LLC’s Tortoise strategy. Before focusing his attention on the Tortoise, Michael co-managed five equity strategies offered by Morningstar Investment Management LLC and Morningstar Investment Services LLC since December 2013. Michael was previously a senior equity analyst on Morningstar Inc.’s equity research team covering companies in the media, business services, and consumer industries. Michael also spent several years on Morningstar’s moat committee, which assigns economic moat and moat trend ratings to their global coverage.

Prior to joining Morningstar in 2004, Michael worked at a public accounting firm and in the business lending arm of a major commercial bank. He has an undergraduate accounting degree from Loyola Marymount University, an MBA from Cornell University and is a CFA charterholder.

About the Editor David Photo
David Harrell
Editor, Morningstar StockInvestor
David Harrell is the editor of the Morningstar StockInvestor, a monthly newsletter that focuses on a wide-moat stock investing strategy. For illustration purposes, issues highlight activities pertaining to Morningstar, Inc. portfolios
Featured Posts
Some Details on Berkshire's Purchase of Amazon Shares

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.

Please see new analyst notes below from Morningstar Research Services for Berkshire Hathaway BRK.B, Comcast CMCSA, Tencent TCEHY, and United Technologies UTX.

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David Harrell,
Editor, Morningstar StockInvestor

Berkshire's New Money Purchase of Highlights a Light Quarter of Activity for the Insurer
by Greggory Warren, CFA | Morningstar Research Services LLC | 05-16-19

There were few surprises in wide-moat Berkshire Hathaway's first-quarter 13-F filing. CEO Warren Buffett had already announced that Berkshire put new money to work in during the quarter, noting that it was one of his lieutenants who purchased the shares, which rings true given that the position size, which cost an estimated $800 million, fell below the $1 billion-plus position size we normally see with stocks Buffett is backing. We were also aware of Berkshire's trimming of its Wells Fargo stake (selling 17.0 million shares for an estimated $800 million) to keep its holdings below 10% of the bank's total outstanding shares, but did not foresee the insurer putting an additional $935 million to work in JPMorgan Chase (acquiring 9.4 million shares). Adding in the purchase of 408,000 additional shares of PNC Financial for an estimated $49 million, Financial Services stocks now account for 44% of Berkshire's holdings.

We were also aware of the additional purchases of shares of Delta Air Lines (5.4 million for an estimated $275 million), which pushed Berkshire above the 10% ownership threshold it has decided to adhere to for all of its holdings (not just banks), paying for part of it by trimming 1.2 million shares from its Southwest Airlines holdings (raising an estimated $60 million). The only other purchase during the quarter was 935,000 additional shares of Red Hat for an estimated $170 million. As for sales, Berkshire sold 6.3 million shares of Phillips 66 (for an estimated $575 million), tendered 1.3 million shares of Charter Communications (for an estimated $420 million), and completely eliminated its remaining (928 share) stake in Verizon Communications. Despite the buying activity during the quarter, Berkshire looks to have tapped just $350 million-$400 million of additional capital to cover its stock purchases. It closed out the first quarter of 2019 with $114.2 billion in cash and cash equivalents, up from $111.9 billion at the end of December.

Comcast Gives Disney Control of Hulu for a Piece of the Upside; Firms Focused on Their DTC Efforts
by Neil Macker, CFA | Morningstar Research Services LLC | 05-14-19

Disney and Comcast have agreed on a unique and complex deal that immediately hands over operational control of Hulu to Disney while providing Comcast the ability to monetize some of the upside in Hulu. The deal will help Disney reach its goals for Hulu, which it views as the third leg in its direct-to-consumer efforts along with Disney+ and ESPN+. On the other side, Comcast can now fully focus on its NBCUniversal streaming service, which will launch in mid-2020. We are maintaining our wide moat ratings for both firms and our fair value estimates of $130 and $45 for Disney and Comcast, respectively.

Under the deal, Comcast gains a put option and Disney a call option on Comcast's 33% stake in Hulu. The options can be exercised as soon as January 2024, with the value of the total Hulu equity set to at least $27.5 billion. Recall that AT&T recently sold its 10% stake in the streaming service back to the firm at a total valuation of $15 billion, which implies roughly 13% annual compounded growth for Hulu's valuation over the next five years. The firms can also ask for an independent valuation of Hulu when the option is exercised, which could result in a higher valuation. Comcast also has the option to fund or not fund any future capital calls, which will be capped to $1.5 billion in equity funding with any additional capital required funded by non-diluting debt. Comcast's equity stake can not be diluted below 21% of Hulu, meaning that Comcast will receive at least $5.8 billion for its ownership stake.

Comcast also agreed to extend its NBCU content licensing agreement and Hulu Live carriage agreement for NBCU channels until late 2024, though oddly NBCU can also end most of these arrangements in three years. Comcast also gained the right to add programming that it has licensed exclusive to Hulu to its own streaming service a year from now, but Hulu would then pay a reduced license fee. The cable giant will also have the right to distribute Hulu on the X1 platform.

Slower Growth at Tencent in 1Q; We Expect Growth to Accelerate in the Rest of the Year
by Chelsey Tam | Morningstar Research Services LLC | 05-16-19

For the first quarter of 2019, wide-moat Tencent's revenue grew 16% year on year, mainly driven by 26% growth in the new segment, fintech and business services. The fintech and business services segment accounted for 26% of revenue, with financial technologies such as commercial payments and microloans contributing the majority of the revenue. Operating profit (which excludes interest income and other gains and losses, unlike reported operating profit) was up 10% year over year, with a 160-basis-points decrease in margin. This reflects the general trend of mix shift toward lower-margin digital content business and fintech and business services. Net profit was up 17% from a year ago to CNY 27.2 billion, helped by CNY 3.5 billion higher net gains. WeChat's monthly active users grew 1% sequentially to 1.1 billion in the first quarter. We have raised our fair value estimates to HKD 510 per share to account for the time value of money. We continue to think Tencent has a lot of monetization potential that is not fully priced in.

Gross margin in the quarter was down 380 basis points year over year, offset by some nonrecurring events. These include lower video content costs in the advertising business due to the delayed launch of certain dramas. Gross margin for fintech and business services was 28.5%, rising 2.4 percentage points compared with the same period last year, despite a loss of interest income from custodian cash accounts since January as per People's Bank of China guidelines. Although the competitive landscape will dictate the need to increase subsidies in the future, Tencent did some operational changes to improve margins in the fintech business. These include offering loyalty program points rather than free withdrawal quotas to mom-and-pop merchants and charging a higher take rate in verticals such as small restaurants.

We Still Believe United Technologies' Breakup Will Unlock Additional Shareholder Value
by Joshua Aguilar | Morningstar Research Services LLC | 05-15-19

After taking a fresh look at United Technologies Corp, we raise our fair value estimate slightly to $149 from $147 previously. While we've made slight cosmetic adjustments to our model reflecting first-quarter 2019 guidance, the increase in our fair value estimate was exclusively due to time value of money. Our long-term assumptions in the stock remain the same since before shares were placed under review. We also retain our wide moat, Standard stewardship, high uncertainty (given continuing execution risk), and stable moat trend ratings.

While the stock trades in 3-star territory, we note that our three-stage DCF values the company in its present conglomerate form. Our sum of the parts value, which becomes increasingly relevant since the company is pursuing a break-up with the spins of Otis and Carrier during the front half of 2020, yields a value of $177 (up from $175 previously). While the 24% upside is considerable, it's still below what other activists peg the break-up value of the company (we're hearing ranges between $190 and $210). We suspect that the difference lies in the dis-synergies we project from breaking up the company, which is greater than what management is currently guiding to. Even so, we still think this is ultimately the right (albeit delayed) move for shareholders since both Otis and Carrier had to forgo growth opportunities to support the company's earnings growth. We also believe the company's focus was largely honed in on aerospace, and our thesis remains that the company will increasingly trade at comparable aerospace multiples over time.

We further believe the combination of Rockwell Collins and UTC leaves a "remainco" with an unequaled portfolio in terms of breadth of products and services, as well as scale in the aerospace industry. Ultimately, we believe aerospace will continue to be a boon for UTC given that industry reports point out that revenue passenger kilometers will grow between 4% and 5% over the next two decades.


Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. Analyst ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst ratings are based on Morningstar’s analysts’ current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst ratings are not guarantees nor should they be viewed as an assessment of a stock's creditworthiness. Ratings, analysis, and other analyst thoughts are provided for informational purposes only; references to securities should not be considered an offer or solicitation to buy or sell the securities.

©2019 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. Morningstar's analysts are employed by Morningstar, Inc. or its subsidiaries. In the United States, that subsidiary is Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Commission.

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

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