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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.

Jan 17, 2018
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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 1/12/2018 -- Results for BlackRock 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 from Morningstar Research Services below for Berkshire Hathaway BRK.B, BlackRock BLK, Compass Minerals CMP, and Wells Fargo WFC. Analog Devices ADI was tagged in a general note about the CES 2018 electronics show, which is also included below.

This morning, Tortoise manager Michael Corty trimmed the portfolio's positions in Visa V and Unilever UL and established a position in Omnicom OMC. Please see his trade alert for more details.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Jain and Abel May Be on Berkshire's Board Now, but Buffett's Successor Remains a Mystery
by Greggory Warren, CFA | Morningstar Research Services LLC | 01-11-18

We were not too surprised to see wide-moat-rated Berkshire Hathaway announce this week that Ajit Jain, who runs the company's reinsurance groups, and Greg Abel, who runs Berkshire Hathaway Energy, have been added to the firm's board of directors (which was increased in size from 12 to 14 seats), given that both men are integral to the company's operations (and have also been the front-runners to succeed CEO Warren Buffett for some time now). That said, this does not do much to make the succession plan at Berkshire any clearer than it was a week ago, with the moves only adding credence to our long-standing belief that Jain and Abel are the two leading candidates to replace Buffett once he departs the scene.

The moves do, however, more clearly lay out Jain's level of authority, with his new title of Vice Chairman - Insurance Operations providing him with oversight of all of Berkshire's insurance operations (including Geico), as well as Abel's, whose new title of Vice Chairman - Non-Insurance Business Operations gives him oversight over the company's remaining segments.

While Jain's experience has primarily been on the underwriting side of the business, his success there has been built on his ability to avoid making "dumb decisions" rather than making "brilliant" ones--attributes that have kept him in good stead with Buffett over the years. The only issue we can think of with Jain is that he has been on the record several times saying that he does not want the top job. At 66 years old, Jain is also older than Abel (55), which could be an impediment to his getting the top job, especially given Buffett's past comments that the company's next CEO "should be relatively young, so that he or she can have a long run in the job." This is the main reason why we regard Abel, who brings with him not only the operational experience of running BHE for many years, but also a ton of experience in making acquisitions, as the more likely successor to Buffett in the longer term.

Organic Growth and Market Gains Lift BlackRock's 4Q AUM; FVE Recently Raised to $550 per Share
by Greggory Warren, CFA | Morningstar Research Services LLC | 01-12-18

There was little in wide-moat-rated BlackRock's fourth-quarter earnings that would alter our long-term view of the firm. We recently raised our fair value estimate for the company's shares to $550, after adjusting our assumptions not only to reflect the close of 2017, but also to account for the reduction of the statutory U.S. federal income tax rate this year to 21%, compared with our previous estimate of 25%.

BlackRock closed out the December quarter with a record $6.288 trillion in managed assets. This was about $170 billion higher than our forecast, with most of the difference coming from market gains. Long-term net inflows of $80.6 billion marked the fifth straight quarter that the firm pulled in more than $75 billion in long-term quarterly inflows. While iShares remains the largest driver of BlackRock's inflows, picking up another $54.8 billion in AUM during the fourth quarter, the firm also saw positive flows from its retail ($11.4 billion) and institutional ($14.4 billion) platforms. BlackRock's organic growth rate of 7.0% over the past four calendar quarters was comfortably above management's annual target rate of 5%. That said, we believe some of the run-up in ETF flows this year was due to the dislocation created by the adoption of the Department of Labor's fiduciary rule, and we would expect organic growth to be tempered somewhat as we move forward.

BlackRock turned 21.6% average long-term AUM growth in the fourth quarter into 16.5% base fee revenue growth, as mix shift and fee compression weighed on results. Better performance fees year over year helped lift fourth-quarter firmwide revenue 20.0% year over year. Top-line growth of 12.0% for the full year was right in line with our 2017 forecast for low-double-digit revenue growth. With regard to profitability, BlackRock reported a 120-basis-point increase in full-year operating margins to 42.2% of revenue, when compared with 2016. The firm also raised its quarterly dividend 15% to $2.88 per share.

Compass Minerals Reports 4Q Snow Days and Salt Volume; We Maintain Our $84 FVE
by Seth Goldstein, CFA | Morningstar Research Services LLC | 01-10-18

Compass Minerals reported fourth-quarter snow days and salt volume sales that were generally in line with our expectations. Compass sold roughly 3.6 million tons of salt during the fourth quarter of 2017, which is roughly 3% below the fourth quarter of 2016. As we noted in our Jan. 5 update, the 2017-18 winter has begun with an above-average number of snow days, which should bode well for Compass' deicing salt profits in the near term. We expect the benefit of harsher late-December weather to show up in Compass' 2018 first-quarter salt sales as governments replenish their deicing salt inventories. We continue to forecast over 12.3 million tons of total salt sales for Compass in 2018, which is roughly 16% higher than 2017. With no changes to our outlook, we maintain our $84 fair value estimate. Our wide moat rating is also unchanged.

Compass reported 57 snow days during the fourth quarter of 2017 in the 11 representative cities that the company measures throughout the Midwest and Great Lakes regions in North America. This figure was 7 days above the fourth quarter of 2016. In our Jan. 5 update, we noted there were 47 snow days during December 2017. There are slight differences in our snow day count and Compass' as Compass includes Toronto and Montreal, while we include Grand Rapids, Michigan, in our 10-city snow day count.

Legal Costs Continue to Impact Wells Fargo's Results in Fourth Quarter
by Jim Sinegal | Morningstar Research Services LLC | 01-12-18

Wide-moat Wells Fargo reported net income of $6.2 billion, or $1.16 per diluted share, for the fourth quarter, producing a return on equity of 12.5% over the past three months--still considerably in excess of the 9% cost of equity we assign to the company. The results included operating losses of $3.5 billion as the company added to legal reserves related to the company's sales practices and other regulatory matters. Changes to U.S. tax law largely offset these charges, as the company booked a $3.89 billion gain on a reduction in its deferred tax liability. We don't expect to significantly alter our $67 fair value estimate.

Average and period-end deposits continued to grow but at only a 2% rate during the year. Deposit rates expanded by 16 basis points during the year, with commercial and sophisticated consumer customers demanding higher rates. For comparison, the Fed Funds rate target rose by around 100 basis points during the same period. Management pointed out that loan demand will be a key driver of deposit beta going forward, and we agree with this view. At this point, it does not appear that banks are short on funding, which bodes well for net interest margin in the near term. Customer growth remained flat, with primary checking customers growing by just 0.2% in the 12 months ending in November. The fact that customers are sticking with the company is encouraging, but the lack of effective growth shows that the company is still suffering from the effects of the sales scandal.

CES 2018 Boosts Our Confidence in Rising Chip Content Per Vehicle and Future Revenue Growth
by Brian Colello, CPA | Morningstar Research Services LLC | 01-12-18

We attended CES 2018, formerly referred to as the International Consumer Electronics Show, in Las Vegas and met with several analog and mixed signal chipmakers under our coverage, as well as some Tier 1 auto-parts suppliers. The emphasis on rising automotive semiconductor content per vehicle continues to be a primary theme, and we see no signs of this secular trend slowing down. In particular, we were most impressed with the progress of light detection and ranging technology, or lidar, with carmakers aiming to implement several lidar-based sensors within each vehicle. In summary, we continue to view the automotive sector as the most attractive revenue growth driver for many firms we cover. We will maintain our moat ratings and fair value estimates for firms we met with at the event, such as Analog Devices (wide moat, $90 fair value estimate), Infineon (narrow, EUR 20), STMicro (none, $17), and Microchip (wide, $97). Although we generally view the group as fairly valued to overvalued, Microchip remains our best pick of the four, as it trades at a slight discount to our fair value estimate, and we suspect that the firm has room for further operating leverage and efficiencies associated with its recent acquisitions.

Of the many demonstrations of semiconductor-related advancements we saw, Continental's "key as a service" might be an easy example of these favorable trends. By using near-field communication and other biometrics, car owners can automatically lock and unlock doors as they approach the vehicle or use their smartphones. With the appropriate backup plans in place, the traditional handle and mechanical key might be replaced altogether. Continental believes that such a hands-free solution might be appropriate for ride-sharing vehicles and car rentals. Such solutions provide chipmakers under our coverage with analog, microcontroller, sensor and connectivity chip content opportunities that were obviously not possible just a few years ago.


*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.

©2017 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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