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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
Updates for Schwab and Oracle

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 Charles Schwab SCHW and Oracle ORCL. Enterprise Products Partners EPD and Magellan Midstream Partners MMP were also included in a note about the attack on oil production facilities in Saudi Arabia. That note, along with a general note about the Fed's rate cut, is also included below.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

An Earnings Decline Is Likely Around the Corner, but We Continue to See Long-Term Value in Schwab
by Michael Wong, CFA, CPA | Morningstar Research Services LLC | 09-18-19

We continue to see long-term value in wide-moat Charles Schwab, but we expect an earnings downturn over the next year or two. Besides more apparent risks such as the overall interest-rate environment and the potential for a bear market, we've become increasingly concerned about the likelihood of the company having accelerated principal payments on its agency mortgage-backed securities portfolio. We assess that long-term interest rates recently fell low enough for many mortgage holders to refinance. This could lead to a material decline in net interest income, as the high-yielding securities the company has on its books essentially mature early and the proceeds have to be reinvested at currently low interest rates. Our forecast for accelerated principal payments is one of multiple adjustments that we made to our model that led to the decrease in our fair value estimate for Charles Schwab to $47 from $47.50.

It seems that Charles Schwab's management is already taking steps to prepare for revenue and earnings headwinds. It was recently reported that the company is reducing its headcount by 3%. In late July, Charles Schwab also announced that it's acquiring the brokerage and managed account business of USAA. While the company can't avoid the likely revenue headwinds to its business, it can buffer an earnings decline with expense savings and earnings from acquisitions.

Second Mover Advantage? Oracle Talks a Big Game on Gen 2 Cloud; Maintain $50 FVE
by John Barrett | Morningstar Research Services LLC | 09-19-19

Wide-moat Oracle closed out its OpenWorld conference on Thursday with an Analyst Day presentation focused on its next generation of products and its strategy to execute on the cloud computing opportunity in front of it. Much of the attention was directed toward Oracle's Gen 2 Cloud platform where the company thinks it has a second mover advantage in catching up to AWS in cloud computing. During the conference, Oracle announced it would be building out capacity for its Gen 2 Cloud Infrastructure in 20 additional regions by the end of 2020. That will bring the region count to 36, up from 4 in 2018. The capacity buildout explains management's capital expenditure guidance of $2.2 billion for fiscal 2020 (an increase of nearly $600 million year over year). We are maintaining our fair value estimate of $50 and believe shares are modestly overvalued.

One of the more interesting developments were management's comments around the Gen 2 Cloud that customers have kept workloads on-premises and have been waiting for Oracle to catch up in the cloud, because other cloud providers offerings did not have the performance or security that large corporations require. Some of the logo wins mentioned were very impressive and the company said it had temporarily sold out of capacity in at least one of the recently launched Cloud regions, leading us to believe demand may be as strong as management claimed. Founder Larry Ellison weighed in on a cloud question that has been a concern for many investors regarding Oracle--what percentage of workloads will stay on-premises going forward? Ellison noted that he thought 90% of customers' workloads would eventually move to the cloud and it could be a $200 billion opportunity for the firm. Ellison made sure to mention that this would vault Oracle ahead of AWS in cloud computing market share, while also reminding the audience that AWS' policy that transfers data security risk to its customers is not client-friendly.

Saudi Attacks Offer Midstream Opportunities; Consider Enterprise, Magellan, and Cheniere
by Stephen Ellis | Morningstar Research Services LLC | 09-16-19

After an attack on Sept. 14, Saudi Arabia has lost about 5.7 million barrels per day of oil production capacity. This is more than half of its capacity and about 6% of world capacity. Two major oil facilities--Abqaiq, an oil processing complex with a capacity of 7 mmb/d, and processing trains with a capacity of 1.2 mmb/d in the Khurais field--have been damaged. Houthi rebels have claimed responsibility for the drone strikes. But the United States--specifically the secretary of state, among others--has cast doubt on that and says the attacks were directly from Iran. The Saudis have been predictably optimistic about being able to partially restore production within days. However, a more realistic scenario is weeks and potentially months, given the complexity of the equipment and testing required, the release of U.S. satellite imagery showing extensive damage, and the lack of even a preliminary assessment of the damage from the Saudis.

Our long-term outlook for midstream firms is unchanged, but we could change our fair value estimates depending on whether new and material investment projects are sanctioned in response. We think midstream firms that could benefit from higher demand for export infrastructure and related pipelines, wider differentials, and higher demand for liquefied natural gas, given oil-linked contracts, include Enterprise Products Partners, Magellan Midstream Partners, and Cheniere Energy. Other firms that could benefit include Plains and Targa Resources.

Oil prices have increased about 10% since the attack. That's a modest response for a disruption of this magnitude, suggesting that the market expects it to be resolved quickly. We think the situation remains fluid and sensitive, with heightened tensions in the Middle East and potential reprisals from Saudi Arabia as well as the U.S. (President Donald Trump has tweeted that the U.S. is "locked and loaded") under its "maximum pressure" policy against Iran.

Juggling Mixed Signals, Fed Lowers Rates by 1/4 Point
by Eric Compton | Morningstar Research Services LLC | 09-18-19

At the conclusion of its September meeting, the Federal Open Market Committee voted to decrease its target rate range to 1.75%-2% from 2%-2.25%. For the third consecutive time under Chairman Jerome Powell's tenure, the vote was not unanimous, with Esther George and Eric Rosengren voting for no change to the benchmark rate. George and Rosengren previously dissented following the July meeting, and both continue to favor holding rates steady. St. Louis Fed President James Bullard also dissented and preferred a heftier cut of 50 basis points. The much anticipated Fed dot plot showed seven members favor one additional cut this year, five prefer keeping rates as-is, and five think rates would be more appropriate in the 2%-2.25% range (at least three of these voters are non-voting).

The language in the Fed's statement highlighted the continually soft business fixed investment and lower inflation, and noted uncertainties around the future outlook. In the press conference, Chairman Jerome Powell also mentioned trade policy tensions and slowing global growth as reasons for the rate cut. The Fed maintained language on acting "to sustain the expansion," indicating a further willingness to make "insurance" rate cuts. A big question for us was whether Jerome Powell still considered rate cuts to be "midcycle" adjustments. Though Powell avoided directly answering the question, we got the sense the cut was more of the midcycle variety, rather than the "beginning of a lengthy cutting cycle." We still view at least one or two more cuts over the next year as the most likely outcome.

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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.

©2019 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.

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 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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