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
Berkshire's Buying Activity
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.

I'll be out of the office tomorrow, so this week's update is coming early. Any analyst notes published later today or on Friday will be included in next week's update.

Please see new analyst notes below from Morningstar Research Services for Analog Devices ADI, Berkshire Hathaway BRK.B, and Meta Platforms FB.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Analog Devices Is Firing on All Cylinders With Impressive Profitability; Maintain $172 FVE
by Brian Colello, CPA | Morningstar Research Services LLC | 05-18-22

Analog Devices reported strong fiscal second-quarter results and provided investors with an upbeat forecast for the July quarter, particularly on the adjusted gross margin line as the company saw a step up in profitability during the ongoing global chip shortage. We maintain our $172 fair value estimate for the wide-moat firm as we're a bit cautious that these good times may not last forever, but shares appear slightly undervalued to us and we still view it as one of the highest quality chipmakers within our coverage.

Revenue in the April quarter was $2.97 billion, up 11% sequentially and above the high end of the firm's guidance of $2.7 billion-$2.9 billion. Compared with pro forma results (including Maxim), we estimate that sales were up about 28% year over year. On a pro forma basis, industrial revenue grew more than 20% year over year for the sixth straight quarter, while automotive revenue grew 10%-plus. Impressively, adjusted gross margin expanded 230 basis points sequentially to 74.2%. The firm cited an improved product mix, high factory utilization, and cost synergies from the Maxim acquisition as drivers of the accretion. In turn, adjusted operating margin rose 450 basis points sequentially to a record high of 50.3%

For the July quarter, the firm expects revenue of $2.95 billion-$3.15 billion, which, at the midpoint, would represent growth of 3% sequentially and would be low-20% growth year over year on a pro forma basis. All end markets are expected to grow sequentially. Adjusted operating margin should be 49.5% due to modestly higher operating expenses, but management was bullish that it can maintain adjusted gross margins in the 74% range in the near term, even as the company strives to add manufacturing capacity. Profitability remains impressive, and we see no signs of the company's free cash flow generation slowing down.

Berkshire Hathaway's 13-F Filing Highlights Major Commitment to Equities in First Quarter
by Greggory Warren, CFA | Morningstar Research Services LLC | 05-17-22

With wide-moat-rated Berkshire Hathaway already giving us a decent glimpse of its buying activity during the first quarter, there were only a few things in its recent 13-F filing that we would consider new information. When Berkshire reported earnings earlier this month, it noted it had purchased $51.1 billion and sold $9.7 billion of equity securities during the March quarter.

Through the company's 10-Q filing and comments around the annual meeting, we noted that Berkshire had purchased 136.4 million shares of Occidental Petroleum for $6.9 billion, an additional 120.9 million shares of Chevron for what we estimated was $18.2 billion, and another 49.7 million shares of Activision Blizzard for $3.8 billion.

On top of that, we had assumed that some of the 109.8 million HP shares that Berkshire reported holding at the start of April were acquired in the March quarter, and we were mainly right, as the insurer reported 104.5 million shares (purchased for an estimated $3.7 billion) in its 13-F filing. This amounts to $32.5 billion worth of purchases, leaving around $18.6 billion in stock purchases unaccounted for.

There were some transactions that will prove more difficult to pin down, like Berkshire's shoring up of its positions in the five Japanese trading houses -- Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo -- by bringing the insurer's ownership stake in each firm up to 5.85% during the first quarter, as well as the purchase of "several different German securities."

What we do know from the 13-F filing is that the insurer acquired more shares of Apple, Floor & Decor, Liberty Formula One, RH, and General Motors during the March quarter for an estimated $1.7 billion. Berkshire also committed an estimated $8.5 billion to new-money purchases of Citigroup, Paramount Global, Celanese, McKesson, Markel, and Ally Financial during the period.

That leaves us with some $8.4 billion worth of unaccounted-for purchases. Some of this might be due to the firm paying higher prices than we are estimating in our projections for the equities purchased during the period, and some might be due to the Japanese and German stock purchases (where we have little information). We'll have to wait until we have more details to fully suss that out.

We do have a pretty good accounting of the $9.7 billion worth of stock sales Berkshire made during the March quarter from the company's 13-F filing. Based on our estimates, the insurer generated $8.1 billion from the sale of 157.4 million shares of Verizon, $450 million from the sale of 3.0 million shares of AbbVie, $350 million from the sale of 5.2 million shares of Bristol-Myers Squibb, $310 million from the sale of 9.7 million shares of STORE Capital, $280 million shares from the sale of 7.2 million shares of Royalty Pharma, $175 million from the sale of 3.4 million shares of Kroger, and $33 million from the sale of 0.7 million shares of Wells Fargo.

The sales of AbbVie, Bristol-Myers Squibb, and Wells Fargo eliminated those stakes from Berkshire's 13-F portfolio, while the redemptions of Verizon and Royalty Pharma significantly reduced those positions (to less than 0.02% each of the insurer's equity holdings). Looking more closely at the 13-F portfolio, Berkshire's top five positions at the end of March -- Apple (42.8%), Bank of America (11.5%), American Express (7.8%), Chevron (7.1%), and Coca-Cola (6.8%) -- accounted for 76.0% of its holdings, and its top 10 holdings--which included Kraft Heinz (3.5%), Moody's (2.3%), Occidental Petroleum (2.1%), U.S. Bancorp (1.8%), and Activision Blizzard (1.4%) -- accounted for 87.2%.

Chevron, Occidental Petroleum, and Activision Blizzard were elevated to top 10 holding status by virtue of all of the buying that Berkshire was doing during the first quarter. The insurer has also continued to buy Occidental Petroleum, picking up an additional 6.8 million shares for $388 million since the start of May. Activision Blizzard will probably end up being a short-term holding, as Microsoft has agreed to acquire it for $95 per share (which would net Berkshire some $2.2 billion if we assume that it paid $78 per share on average for its 9.5% stake). The Microsoft-Activision deal, which has faced some regulatory scrutiny, has until June 2023 to close.

From a sector allocation perspective, given all of the changes in Berkshire's 13-F portfolio during the first quarter, the financial services sector now accounts for 24.9% of the portfolio (down from 26.4% at the end of December 2021), with technology stocks at 45.0% (down from 49.3%) and consumer defensive names decreasing to 11.3% (from 11.6%). The rest of the $363.5 billion 13-F equity portfolio (up from $330.9 billion at the end of December 2021) was made up of holdings from the energy (9.3%), communication services (2.9%), consumer cyclical (2.5%), industrials (2.3%), healthcare (1.4%), basic materials (0.3%), and real estate (0.1%) sectors (as defined by Morningstar).

On a separate note, over the course of the past several weeks, Berkshire's shares have traded off pretty hard, dropping from $506,200 per Class A share and $337 per Class B share at the market close on April 25 to $464,250 and $309, respectively, at the market close on May 16. This left the shares trading at a more than 15% discount to our respective fair value estimates of $550,000 and $367. At 1.25 times our projected book value per share for firm at the end of 2022 and 1.11 times our 2023 estimate, the company also looks undervalued relative to historical levels, with the shares having traded at an average of 1.42 and 1.41 times trailing calendar year-end book value per share the past five and 10 years. We would be more encouraged if the shares were to drop closer to a 20% discount to our fair value estimate, as Berkshire is still somewhat of a slow grower and tends to be more of a defensive stock, underperforming the broader market during better years for equities and doing much better than the market when it goes into correction/bear market territory.

As for how CEO Warren Buffett might be looking at the shares right now, Berkshire has been willing to buy back its own shares as high as 1.47 (1.38) times prior (upcoming) book value per share, with the average price paid being 1.33 (1.29) times per prior (upcoming) book value per share during 2018-22. As such, we would expect to see more share repurchases when the value is at or below the average price paid in the past, which is where we are right now. We would be highly surprised, then, to see Berkshire buy back less than the $6 billion-$8 billion in quarterly share repurchases that it could do during 2022-26 when no other options are available during the second quarter of 2022.

Meta's Advertising Business Will Turn Around; Shares Undervalued
by Ali Mogharabi | Morningstar Research Services LLC | 05-19-22

Meta stock has declined significantly over the last eight months as increasing competition and further enforcement of data privacy policies have slowed revenue growth and pressured margins. But we think the market is ignoring the high probability that double-digit advertising revenue growth will return on the back of the platform's network effect moat source, which has helped further increase the number of users and engagement on its apps. We continue to believe shares of wide-moat Meta, trading at half of our $384 fair value estimate, are very attractive.

With its 3.6 billion users and investments in new advertising options for clients, we expect that increased adoption of ads within short-form videos, which Meta has dubbed Reels, will help the firm compete more effectively against the likes of TikTok. The firm is also investing in improving its ad performance measurement tools, which we think will increase utilization of less detail-level data as Apple and possibly various governments continue to limit data access to protect privacy. These efforts should increase current advertiser spending and attract new advertisers, increasing user monetization and driving revenue from Meta's family of apps -- Facebook, Messenger, Instagram, and WhatsApp -- higher.

With a return to solid top-line growth, we expect a return to margin expansion beginning in 2023. We expect Meta will continue to generate significant free cash flow as cash generated from family of apps digital advertising will more than offset cash burned during the next few years to develop and build a business around the metaverse.

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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.