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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
Roundup 10/12/2018 -- Positive Signs for Wells Fargo

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 BlackRock BLK, Omnicom OMC and WPP WPP, Starbucks SBUX, and Wells Fargo WFC.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

BlackRock and T. Rowe Price Remain Our Top Picks for Long-Term Investors
by Greggory Warren, CFA | Morningstar Research Services LLC | 10-08-18

It's been a difficult year for the U.S.-based asset managers, with the 12 firms we cover down close to 20% on average since the start of 2018, compared with a nearly 8% price gain for the S&P 500 index. While valuations have become depressed across the group, they've also bifurcated between perceived "haves" -- wide-moat-rated BlackRock and T. Rowe Price and narrow-moat-rated Eaton Vance and Cohen & Steers -- which are generating above-average rates of organic growth and operating margins (and trading at 25%-plus premiums to the group on a price/earnings basis), and those viewed as "have nots" -- narrow-moat-rated Invesco, Affiliated Managers Group, Franklin Resources, Legg Mason, and Janus Henderson and no-moat Waddell & Reed -- some of which deserve to be trading at steep discounts (of more than 25%) to the group.

We feel the industry itself is at a bit of a crossroads, with a handful of different forces -- including increased regulation of asset and wealth management globally, distribution-channel disruption on the retail-advised side of the business in the U.S. and other developed markets, the ongoing shift from active to passive products, and a greater focus on relative and absolute fund investment performance and fees--having an impact on asset manager fees and expenses, which is working against the ability of these firms to generate sustainable levels of organic growth and increase profitability. Given this environment, we still recommend that long-term investors focus on BlackRock, the leading provider of exchange-traded funds, with two thirds of managed assets and half of revenue coming from passive products, as well as garnering more than 80% of its assets under management from institutional clients, and T. Rowe Price, which has the best and most consistent active investment performance in the group (and is a leader in the industry as a whole) and derives two thirds of its AUM from retirement-based products.

WPP Loses Ford Creativity to Omnicom, but Volkswagen Opportunity Remains; Both Stocks Undervalued
by Ali Mogharabi | Morningstar Research Services LLC | 10-09-18

On Oct. 8, Ford Motor Company finally decided on which ad agencies it will work with going forward and chose Omnicom's BBDO as its creative agency, displacing WPP. However, Ford did retain WPP as its media agency. While Ford's decision will help Omnicom organic revenue growth in 2019, in our view, its negative impact on WPP revenue will not be significant. Plus, we must note that WPP has an opportunity to offset the effect of Ford's decision, as it is one of the final three agencies pursuing the Volkswagen account. We have not adjusted our projections for Omnicom or WPP and are maintaining our per share fair value estimates of $85 and GBX 1,500 for the two firms, respectively. Omnicom and WPP are 4-star stocks, which we continue to recommend for investors.

Starbucks Remains One of Our Top Ideas in Restaurants, and We Agree with Ackman's Investment Case
by R.J. Hottovy, CFA | Morningstar Research Services LLC | 10-10-18

By and large, our positive long-term outlook on wide-moat Starbucks was reinforced by the investment case laid out by Bill Ackman to support his $900 million stake at the Grant's conference on Oct 9. While it won't be an overnight turnaround, we believe the U.S. same-store sales corrective measures were the highlight of the presentation, most notably a focus on premium product innovation and boutique concepts (helping satisfy "experience" customers who have switched to other specialty coffee chains) and increased store labor and improved mobile order and payment app (to address the needs of "convenience" consumers). Coupled with new healthy/better-for-you cold beverage and food innovations, a loyalty program enrollment and afternoon daypart transactions, Ackman's proposed slowdown for U.S. licensed store growth (reducing potential cannibalization), we see a path for 3% comps over the next two years (with acceleration beginning in the second half of fiscal 2019) and 4% over a longer horizon.

We've also long held the belief that Starbucks' CPG and China assets were underappreciated, points that Ackman laid out. Luckin Coffee and other delivery-first, value-priced competitors have been disruptive to Starbucks China, but we still identify a compelling long-term story there (backed by strong consumer demand and favorable unit economics). Starbucks has been behind the delivery curve, but we believe the nationwide rollout of delivery via Alibaba's in 2019 will help bring China comps back to the low/midsingle digits. We also believe the CPG partnership with Nestle can more rapidly unlock long-term value due to Nestle's global distribution network and single-serve platform.

We're not planning changes to our $64 fair values estimate, and while we expect stock price volatility as Starbucks rolls out strategic initiatives and introduces 2019 guidance, we believe investors are effectively being paid to wait with a 2018-20 cash return target of $25 billion.

Small Additional Legal Accrual for Wells, but Expenses Remain on Target for Longer-Term Decrease
by Eric Compton | Morningstar Research Services LLC | 10-12-18

Wide-moat Wells Fargo continues to wade through its legal issues, recording another $241 million in remediation accruals. However, operating losses were at $605 million, down from $619 million last quarter, and far lower than the over $1 billion in losses per quarter for multiple quarters preceding this. This is at least in the right direction, and the bank announced no new legal issues, as the charges were related to already announced items. The return on average tangible common equity improved to 14.3%, and diluted EPS was up over 30% year over year. If Wells can begin to get past its legal and operating woes, maintain expense discipline, and return to anywhere close to its former profitability, the bank is arguably undervalued at today's prices. We are maintaining our fair value estimate of $67 per share.

Primary consumer checking customers were up 1.7% year over year, retention rates for these customers reached a five year high, and debit and credit card purchase volumes were also both up year over year. We view these as positive signs that Wells' underlying consumer business has not been permanently weakened or impaired. Average loan balances were down, which was largely expected, and this was across a broad number of different loan portfolios. However, average credit card balances still managed to grow quarter over quarter for the bank. Credit quality remained pristine, as the net charge-off ratio remained range-bound and provisions picked up only slightly. Management reiterated their expense guidance, and we see the bank being able to consistently decrease the expense base through 2020. This is partially helped by the assumption that legal accruals will not be as sizable and will eventually go away, but it is also based on taking real costs out of the business as well.

Given how Wells is repositioning its balance sheet, it hasn't seen as much of an increase in net interest margins as some peers. However, the bank’s deposit betas remain low, and we still project some expansion in net interest margins helping offset the shrinking balance sheet. Fee income was roughly flat year over year. The bank’s trust and investment fees continued their slow downward trend, but Wells surprisingly saw an uptick in mortgage related fees, despite current headwinds. Expenses remain well in line with our own projections, and we largely view Wells as an expense story over the next several years. Even with little to no revenue growth, if the bank can control expenses and eliminate legal charges, Wells should be well on its way to regaining its past profitability.


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.

©2018 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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