Investment Strategy
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 Morningstar.com. 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 1/14/22 -- Strong Results for JPMorgan Chase and 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 and updates below from Morningstar Research Services for Enterprise Products Partners EPD, JPMorgan Chase JPM, Taiwan Semiconductor Manufacturing Company TSM, and Wells Fargo WFC.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Enterprise to Acquire Navitas Midstream for $3.25 Billion; We Expect Strong Near-Term Returns
by Stephen Ellis | Morningstar Research Services LLC | 01-10-22

Enterprise Products Partners has agreed to acquire Navitas Midstream for $3.25 billion in cash, to be funded by cash on hand and credit facilities, and the deal is expected to close in the first quarter of 2022. Navitas' assets include over 1 billion cubic feet per day of natural gas gathering capacity and represent Enterprise's entry point into Midland gas and natural gas liquids processing, as its existing assets only include downstream pipes. We think the deal makes sense from a financial perspective, as Enterprise's expected midpoint of $0.20 in distributable cash flow (DCF) per unit from Navitas in 2023 equates to a nearly 14% return on investment (about $441 million in DCF on a $3.25 billion investment). The relatively high returns are likely due to the recent construction of the assets (2018 to present), meaning they are likely located in some of the best areas of the Midland basin with breakevens below $40 a barrel, but also contributions from high oil and gas prices. We will maintain our fair value estimate and wide moat rating for Enterprise while we incorporate the deal into our model, likely alongside Enterprise's upcoming fourth-quarter earnings, where management could also reveal more information about the contract structure. Where the fee floors are set in the contracts are particularly important to maintaining Enterprise's returns if near-term oil and gas prices decline substantially.

The downside is that we do not expect the assets to be particularly moaty, given the high level of competitive intensity in the basin. This is a fact that even Enterprise acknowledged in the past as a reason why it did not own Midland G&P assets. While contracts tend to be long term, acreage dedication contracts are dependent on producer solvency, activity, and acreage economics, and building G&P assets have a low barrier to entry, as evidenced by the relatively quick build-out of Navitas.

Solid Finish to 2021 for JPMorgan, but Investments Will Weigh on Expenses in 2022
by Eric Compton, CFA | Morningstar Research Services LLC | 01-14-22

JPMorgan Chase reported decent fourth-quarter earnings per share of $3.33, beating the FactSet consensus of $3.01 and our own estimate of $2.87. Revenue on a reported basis came in at $29.3 billion compared with our estimate of $30.4 billion. The EPS beat was primarily attributable to lower provisioning than we expected.

Our biggest focus for JPMorgan remains on how interest-rate hikes will feed through into net interest income, how well fees can hold up given the bank's higher exposure to investment banking and trading, how the expense base progresses given the bank's continued investments in technology and growth, and how the bank's growth initiatives contribute to revenue.

Overall, we were a bit surprised by the expense guidance. We had expected a potential increase in investment, but management flagged a roughly 30% increase in investment-related spending, along with a 6% increase in "structural" expenses, which we read as wage inflation. Also, the bank's estimated rate sensitivity dropped compared with what was disclosed for the third quarter. These two changes will lead us to decrease what we may have expected in 2022. We had planned to increase our $149 fair value estimate by roughly $12 per share due to our updated tax rate assumptions; however, as we incorporate a higher increase in structural spending and investments, this will be tamped down.

TSMC Guidance Signals Strong High-End Semiconductor Demand
by Phelix Lee | Morningstar Research Services LLC | 01-13-22

We lift our fair value estimate on Taiwan Semiconductor Manufacturing, or TSMC, to TWD 990 per share (USD 179 per ADR) due to increases in five-year revenue CAGR to 16.5% from 14.3% and up to 1.5 percentage points change in gross margin assumptions. These changes mainly stem from MediaTek's entry into the premium chipset in 2022, a stronger pipeline of high-performance computing, or HPC, and demand and increasing certainty from autonomous driving thereafter. Hence, we see fears of slowing smartphone and PC shipments as minor grievances held by the bear camp. In our December 2021 special report “For Asian Foundries, Chip Shortage May Turn Into a Glut in 2024,” we discussed how new applications in automotive and Internet of Things struggle to fill industry capacity. In the case of TSMC, we believe its superior offerings in the 7nm to 28nm processes can retain customers in case of a downturn. TSMC is trading at 24 times 2022 P/E and 7 times 2022 price/book, a similar multiple to three months ago with lower estimated sales CAGR, meaning the stock is an even more solid buy in our view.

TSMC surprised us with a capital expenditure budget of USD 40 to 44 billion, topping our October 2021 estimate of USD 38 billion, and represents a 33%-44% increase over 2021. Over 70% of the budget will be spent on cutting edge processes (2-7nm); 10% on packaging technologies; and the rest on mature technologies, notably the 28nm process. Combined with management expecting a higher medium-term revenue CAGR of 15%-20% versus 10-15% last year, the aggressive budget cements our view that TSMC will be the key beneficiary of multiple semiconductor growth drivers like autonomous driving, HPC, and 5G. Given TSMC's technological lead, most of its pipeline capacity should be well differentiated in order to mitigate price plunges should market conditions reverse.

Excellent Q4 for Wells Fargo as Expense Initiatives Remain on Track, Rate Sensitivity Coming Through
by Eric Compton, CFA | Morningstar Research Services LLC | 01-14-22

Wells Fargo reported solid fourth-quarter earnings per share of $1.38, beating the FactSet consensus of $1.11 and our own estimate of $1.15 (after making some tax rate adjustments). Revenue came in at $20.9 billion compared with consensus of $18.8 billion, while our estimate was a bit lower at $18.4 billion. The beat was primarily attributable to higher-than-expected net interest income and fee income.

NII came in higher than our expectations at $9.3 billion, as curve steepening likely helped, while the bank also made some securitized loans during the quarter. Fees were strong as the bank recorded $2.5 billion in gains from its venture capital/private equity business, along with gains of $943 million from the sale of the asset-management and corporate trust businesses.

The biggest focus for Wells Fargo remains its net interest income sensitivity, expense base progress given cost-cutting initiatives and regulatory investments, and progress on its regulatory issues. Overall, we think investors will react positively to the Jan. 14 earnings given the quarterly beat, expense plans staying on track, and the extra rate sensitivity coming through in what we expect to be 8% growth in NII in 2022, even without material balance sheet growth. We expect to raise our fair value estimate to at least $61 per share based on our updated tax assumptions, with potentially another several dollars coming through as we update our rate assumptions and other assumptions. We look forward to more details on the earnings call.

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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.

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Disclosure: 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 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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Contact Your Editor
 
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 Morningstar.com. 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.

Investment Strategy



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.