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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 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 11/25/20 -- Fair Value Increases for Analog Devices and Charles Schwab

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 Analog Devices ADI, Charles Schwab SCHW, and Enbridge ENB. Several holdings were also tagged in a general note about President Trump's recent orders about U.S. drug pricing.

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David Harrell,
Editor, Morningstar StockInvestor

Analog Devices Remains on the Road to a Recovery in Chip Demand; Raising FVE to $130 from $106
by Brian Colello, CPA | Morningstar Research Services LLC | 11-24-20

Analog Devices reported strong fiscal fourth-quarter revenue that was above the high end of the firm's previous guidance, thanks to a healthy bounceback in chip demand from automotive and factory automation customers, which were two segments hit hard by the COVID-19 pandemic. ADI's outlook for the January quarter was also ahead of our expectations. We will raise our fair value estimate to $130 per share from $106. The increase stems from the time value of money as we roll our valuation model, brighter near-term expectations as we look into fiscal 2021, and a slightly higher long-term earnings growth forecast. We view shares as fairly valued.

Revenue in the October quarter was $1.526 billion, up 5% sequentially, up 6% year over year, and above the high end of the firm's previously forecast range of $1.37 billion-$1.51 billion as discussed in August. Automotive chip sales were the bright spot, up 42% sequentially and 2% year over year as vehicle manufacturing activity picked up after COVID-19-related shutdowns. Industrial chip sales were up 5% sequentially and 9% year over year, with factory automation the bright spot as ADI's chips going into manufacturing machinery grew for the first time in over two years. Communications chip sales were down 14% sequentially but up 19% year over year despite further restrictions on chip sales into Huawei. ADI doesn't believe that any communications chip sales were an early pull in from Huawei or others out of fear of future bans. Higher sales levels enabled adjusted gross margin to rise 160 basis points year over year to 70.0%.

Charles Schwab Has Near-Term Headwinds but Also Valuable Long-Term Synergies With TD Ameritrade
by Michael Wong, CFA, CPA | Morningstar Research Services LLC | 11-23-20

The competitive and economic environment for wide-moat Charles Schwab and other retail brokerages has dramatically changed over the past year. Charles Schwab merged with its longtime peer TD Ameritrade, while E-Trade merged with Morgan Stanley after commissions on many common types of trades were set to $0 in October 2019. In 2020, the global economy went into freefall because of COVID-19, and monetary authorities have cut interest rates to near 0%.

Given the precipitous decline in net interest revenue and a triple-digit spike in trading volumes, we decided to provide an assessment of whether we've hit bottom for interest-rate-related income and whether current trading volumes are sustainable. We don't think interest-rate-related income has bottomed, because of prepayments and reinvestment risk in Charles Schwab's residential mortgage-backed securities portfolio, lower reinvestment rates in TD Ameritrade's bank deposit account agreement, and we expect money market fund fee waivers to double. We believe the move to $0 commissions has permanently elevated trading volumes for the retail brokerages. But we also believe volumes related to COVID-induced market volatility, changes in behavior due to self-quarantining, a massive run in technology stocks, and the anecdotal rise in recreational traders will prove transient. Ultimately, we forecast retail brokerage trading volumes may fall 20%-50% from recent levels but remain significantly higher than they were before $0 commissions.

Holding all else constant, we forecast that over the next two years, Charles Schwab-TD Ameritrade's revenue could fall 13% from its annualized third quarter of 2020 level due to the factors we identified. That said, we would see significant declines in the stock price as a buying opportunity, as we also forecast significant synergies from the merger of Charles Schwab and TD Ameritrade. We are raising our fair value estimate for Charles Schwab to $47 per share.

Enbridge: Line 3 Receives Federal Water Permits; Two Permits Remain
by Joe Gemino, CPA | Morningstar Research Services LLC | 11-24-20

Wide-moat Enbridge received all the necessary federal permits from the U.S. Army Corps of Engineers, including the Section 404 water permit, on Nov. 23. With the federal permits secured, Enbridge still needs two additional permits before it can start construction. Enbridge previously applied to the Minnesota Pollution Control Agency for the construction stormwater permit and is waiting for the final permit. Now that Enbridge has received the federal water permits, it can apply to the Minnesota Public Utilities Commission for the final authorization to construct. We don't anticipate any difficulties in receiving the final construction permits based on the MPCA granting the stringent 401 permit and the MPUC voting to uphold Line 3's certificate of need multiple times. At this time, Enbridge is hopeful that it can receive the final two permits and start construction on the pipeline this year. We continue to expect construction to take six to nine months, and the end of 2021 still looks like an appropriate in-service date. We are maintaining our $43/CAD 56 fair value estimates, which include the probability that the pipeline is built and fully operational at 80% and that the pipeline is protected by its integrity replacement status at 20%.

Implementation of Trump's Recent Efforts to Affect Drug Pricing Seems Unlikely
by Damien Conover, CFA | Morningstar Research Services LLC | 11-23-20

President Donald Trump issued several orders on Nov. 20 designed to lower U.S. drug prices, but we don't expect implementation of the orders due to legal challenges, lack of support from the U.S. Congress and the new Biden administration, and unclear financial impacts. As a result, we don't expect any major impact on the U.S. pricing power of drugs, a core pillar of the moats and valuations in the drug industry.

One of the White House directives focused on pricing 50 of the largest Medicare B drugs (hospital-administered drugs) at the lowest levels paid by developed countries. While this would significantly affect U.S. prices, as we estimate drug pricing in the United States is close to double prices in developed markets, we expect valid industry legal challenges to stop this order. The order doesn't appear to have followed the normal legal process and instead was rushed out for Trump to enact the policy before leaving office. Additionally, we believe the rule is difficult to implement without legislative support from Congress. Further, we don't expect the Biden administration to focus initially on U.S. drug pricing, especially in the form of these recent proposals that lack full legal and congressional support.

A second White House directive targeted the elimination of pricing rebates in the U.S. drug system, an entrenched system that is very complex to undo through presidential order, especially without a clear analysis of financial implications. While we expect the drug industry to support the removal of rebates as drug firms only receive payments excluding rebates, we expect the payer groups will oppose the rule, given the importance of rebates in payer strategies. With a high degree of uncertainty regarding the impact on the federal budget, we expect the payer groups will be successful in stopping this effort to repeal drug price rebating.

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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.

©2020 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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