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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.

Sep 25, 2017
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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 9/22/2017 -- Compass Reduces Guidance for 2017

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.

Compass Minerals CMP, a holding in Morningstar's Hare portfolio, announced yesterday that its Goderich, Ontario salt mine would be operating at reduced rates in the near term after a partial ceiling fall. Compass anticipates a return to normal operating rates within six weeks. This development led the firm to adjust its full-year earnings per share guidance from $3.00-$3.50 to $2.50-$2.80. Shares of Compass closed today at 13.53% below their opening price. Morningstar Research Services hasn't changed its long-term forecast for Compass and believes the market's reaction was overblown, but lowered its fair value estimate by $1.00, reducing it to $84.00 per share. Please see a new analyst note for Compass below.

Also below are notes about Alphabet's GOOG/GOOGL purchase of some of HTC's smartphone assets and CarMax's KMX second-quarter results, as well as a general note about the Federal Reserve's Open Market Committee's target rate for the federal-funds rate, which will remain at 1.0% to 1.25%.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Compass Trims EPS Guidance After Seismic Event at Goderich and Plant Nutrition Struggles in Brazil
by Daniel Rohr, CFA | Morningstar Research Services LLC | 09-22-17

On Sept. 21, Compass Minerals trimmed its full-year 2017 earnings per share guidance to $2.50-$2.80, down from $3.00-$3.50, due to two reasons. First, the company's flagship Goderich salt mine in Ontario saw a partial ceiling collapse due to geological movements on Sept. 18. The mine's main conveyance system has been damaged, with a return to normal operating rates expected within six weeks. Second, plant nutrition volumes in Brazil have continued to lag management's expectations.

We've updated our forecast for the weakness in 2017, but our long-term forecast remains unchanged. In particular, we don't expect Goderich's geological challenges to extend beyond this year. As a result of our changes, we've lowered wide-moat Compass's fair value estimate to $84 per share from $85.

With shares trading down roughly 10% to less than $63 per share as we write, we think the market's reaction is overblown. We see little reason to believe that either issue will linger in the long term. Furthermore, as we return to more "normal" winters, we expect to see significant improvement in Compass's salt business.

Google Continues Its Pursuit of Recognition in the Smartphone Market by Bringing on Board HTC Talent
by Ali Mogharabi | Morningstar Research Services LLC | 09-21-17

Alphabet's Google announced it is purchasing HTC's Pixel-only talent and non-exclusive rights to some of HTC's IPs for approximately $1.1 billion in cash. In our view, this deal represents Google's further emphasis on its end-to-end consumer hardware development strategy as price is no longer a differentiator for Google. We think the firm is targeting the smartphone and overall consumer hardware market more aggressively to maintain and/or grow its dominance in the online search market. We believe this could further strengthen Alphabet's network effect and intangible assets moats as Pixel and other hardware can bring in more users, increasing user count and user engagement, from which more data will be compiled and utilized to drive more online ad revenue growth. It remains to be seen whether such a tactic will bear fruit, as Google is in fierce competition with Apple and Samsung within the smartphone market. We still have a wide-moat rating and a $910 fair value estimate for this 3-star name.

In our view, Google's main intention is to have more control over and to speed up its Pixel smartphone integration with various innovations that the company adds to its Android operating system, Google Assistant, and apps utilizing the two. This can strengthen the firm's overall ecosystem as it creates some commonality, mainly Google Assistant, among nearly all its hardware offerings. The firm is scheduled to introduce its latest Pixel smartphone next month, and this agreement displays Google's long-term commitment to such as strategy.

We do not expect this acquisition to strain Google's relationship with some of the world's leading Android-based smartphone vendors. In our view, the vendors would be hesitant to change their smartphone's Android operating system that has created some stickiness for the smartphone users. According to IDC, vendors such as Samsung, Huawei, and LG have worldwide smartphone market shares of 20%, 8%, and 3%, respectively, which we don't think they want to risk losing. Those vendors are also aware that Pixel and its mere 1% market share do not pose a threat, for now.

According to both companies, this deal is likely to close in early 2018.

CarMax Keeps Rolling Along in 2Q Despite Hurricane Harvey
by David Whiston, CFA, CPA, CFE | Morningstar Research Services LLC | 09-22-17

CarMax reported solid fiscal 2018 second-quarter results, and we are raising our fair value estimate to $63 per share from $58. The increase results from the time value of money adjustment in our model, a lower share count due to an increase in buyback spending, and an increase in operating income growth beyond our five-year forecast period. Earnings rose 16.7% year over year to $0.98, which beat consensus of $0.95; we calculate 11.9% growth excluding buybacks. Buybacks continued with $156.5 million worth of shares bought at an average price of $62.60 per share; $1.25 billion remains on the authorization.

Hurricane Harvey in Houston cost CarMax about $1 million after insurance deductibles, mostly from 1,000 lost vehicles, but overall company comparable-store used-vehicle unit sales still rose 5.3% year over year and all six stores affected by the storm have reopened. Management did not give much detail on Hurricane Irma’s impact beyond saying it closed 28 stores, mostly in Georgia and Florida; it will give more detail Dec. 21 when it reports the fiscal third quarter. Management indicated it is not worried about being able to meet a surge in demand after the storms and its IT systems are more sophisticated than after Hurricane Katrina 12 years ago. Buyers are also trained to look for flood damage during the appraisal process; CarMax will sell vehicles with flood damage into salvage auctions to protect itself from liability.

The online appraisal process program is now expanding from Charlotte to the Midwest. We think anything that makes the buying experience easier for consumers and more like buying anything else online is the right strategy. Some states restrict retailers from delivering a vehicle to a customer, as opposed to in-store pickup, so management over time will seek to provide more improvements in delivery for however the customer wants it within the laws of each state. Home delivery is in Charlotte for now but should expand over time.

The Federal Reserve's Open Market Committee Takes Its Time in Light of Low Inflation
by Jim Sinegal | Morningstar Research Services LLC | 09-20-17

The Federal Reserve's Open Market Committee (FOMC) once again chose to maintain the target range for the federal-funds rate at 1.0% to 1.25%, despite growth in both household spending and business investment, as inflation measures remain below its 2% target. This action is consistent with our thesis that yield curve normalization will continue at a relatively modest pace due to a combination of trends in demographics, employment conditions, and credit demand. As long as inflation remains low, the Federal Reserve could choose to raise rates but does not need to raise rates--an important distinction, in our view. Indeed, the latest statement reveals that the FOMC expects short-term rates to "remain, for some time, below levels that are expected to prevail in the longer run."

Our view has been informed by long-term rates, which also seem consistent with an extended low-rate environment. Ten-year bond rates are essentially the same as they were two years ago, despite the progress in economic measures over the past 24 months. We believe that long rates would move up more dramatically if the Fed's current stance was too accommodative, and that current levels support our thesis that the central bank's policy stance may be closer to neutral than many observers believe.

However, the Fed will begin the process of winding down its massive balance sheet in October. Quantitative easing has no doubt had some influence on long-term rates, and the market reaction to the upcoming reversal of policy will provide more information on the future course of rates.

Finally, we believe bank stock prices have fully incorporated the benefits of higher interest rates, leaving little upside even if the normalization process happens much faster than we expect. We believe banks like Wells Fargo offer better value, as the company's future depends on repair of its reputation rather than purely macro factors.


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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.

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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.

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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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