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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.

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 Activity and Results for IQvia, Pepsi, and Omnicom

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 Berkshire Hathaway BRK.B, IQvia IQV, Microsoft MSFT, Omnicom OMC, and PepsiCo PEP.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Berkshire Opens Stakes in Red Hat, Suncor, and StoneCo, Adds Meaningfully to JPMorgan, Dumps Oracle
by Greggory Warren, CFA| Morningstar Research Services LLC | 02-15-19

There were a few surprises in wide-moat Berkshire Hathaway's fourth-quarter 13-F filing. While we expected to see some buying activity given the sell-off in the equity markets during the period, we were surprised by the scale and the scope of the purchases. Berkshire's biggest buy involved JPMorgan Chase, with the insurer spending an estimated $1.5 billion to increase its stake in the bank by 40%. The firm also increased its stake in PNC Financial by 36%, acquiring another 2.2 million shares of the bank for an estimated $275 million, and made smaller additions to U.S. Bancorp, Bank of New York Mellon, and Bank of America. Berkshire increased its stake in Travelers by 68%, picking up 2.4 million shares for an estimate $300 million, and lifted its stake in General Motors by 38%, acquiring another 19.8 million shares for an estimated $665 million.

The company made three new money purchases during the quarter, picking up 4.2 million shares of Red Hat (for an estimated $650 million), 10.8 million shares of Suncor Energy (for an estimated $360 million), and 14.2 million shares of StoneCo, which had its initial public offering in late October (for an estimated $345 million). These purchases were offset in a large part by the elimination of Berkshire's stake in Oracle (netting an estimated $2.1 billion), as well as sales of shares of Wells Fargo ($770 million), Apple ($555 million), Phillips 66 ($350 million), United Continental ($350 million), Charter Communications ($90 million), and Southwest Airlines ($65 million), some of which--Wells Fargo and the airlines--were ongoing adjustments to keep Berkshire's total ownership stake below 10%. With a few exceptions--American Express, Kraft Heinz, Moody's, DaVita, and USG (to name a few)--the insurer is looking to avoid owning 10% or more of an investee's shares, purely to limit regulatory complications, especially with bank holdings. As some of these companies buy back stock, Berkshire is forced to trim its positions.

These changes in the portfolio, as well as market movements, during the December quarter had an impact on Berkshire's top stock holdings. At the end of 2018, the company's top five positions--Apple (21.5%), Bank of America (12.1%) Wells Fargo (10.7%), Coca-Cola (10.3%), and American Express (7.9%)--accounted for 62.6% of its $183.1 billion portfolio (down from 64.5% of a $221.0 billion portfolio at the end of the third quarter, when Kraft Heinz was Berkshire's fifth-largest holding). Meanwhile, the insurer's top 10 holdings--which now include Kraft Heinz (7.7%), U.S. Bancorp (3.2%), JPMorgan Chase (2.7%), BNY Mellon (2.1%), and Moody's (1.9%)--accounted for 80.1% of the portfolio (versus 80.3% previously).

IQvia Reports Another Solid Quarter; We Like the Narrow-Moat Business, but Shares Remain Overvalued
by Anna Baran | Morningstar Research Services LLC | 02-14-19

We don't anticipate a material change to our $114 fair value estimate after narrow-moat IQvia reported its fourth-quarter earnings. Revenue and earnings came in slightly above our and analyst expectations, with fourth-quarter revenue of nearly $2.7 billion representing 8% year-over-year growth in constant currency. Top-line growth was driven by solid results in technology and analytics (up nearly 11% in constant currency, slightly above our expectations) and research and development (up over 8% in constant currency, in line with our expectations), while the contract sales segment continued to decline, as expected. Management guidance for 2019 was slightly lower than we expected on the top line, but we are still comfortable with our long-term forecast of mid- to high-single-digit revenue growth.

The technology and analytics solution posted over $1.1 billion in revenue in the fourth quarter, driven by demand for its constantly changing portfolio of commercial offerings, including the OCE platform for life sciences client relationship management and marketing, as well as double-digit growth in real-world evidence offerings. Management noted that the company will be working on a number of single-arm trials, which are a hybrid of traditional clinical trials that use real-world data for a comparator arm. IQvia's ability to leverage its unmatched data assets in drug development is one pillar supporting the company's narrow moat, and we expect IQvia to maintain its leading position in the emerging space of real-world evidence.

Microsoft Continues to Evolve Into a Cloud Leader; Shares Undervalued vs. Our $125 FVE
by Dan Romanoff | Morningstar Research Services LLC | 02-11-19

We believe Microsoft is a blue-chip technology stock that offers approximately 15% EPS growth in each of the next several years, powered by impressive 11%-12% top-line growth. We maintain our wide moat and stable moat trend ratings for Microsoft, and although we are lowering our fair value estimate to $125 per share from $130, we still view the shares as modestly undervalued. Our fair value estimate implies a price/earnings of 25 times on fiscal 2020 EPS.

Since taking over as CEO in 2014, Satya Nadella has reinvented Microsoft into a cloud leader. Most obviously, Microsoft has become one of two public cloud providers that can deliver a wide variety of platform-as-a-service and infrastructure-as-a-service solutions at scale. Additionally, Microsoft has accelerated the transition from a traditional perpetual license model to a subscription model. Lastly, Microsoft exited the low-growth, low-margin mobile handset business and is increasingly cloud-driven even in gaming. These factors have combined to drive a more focused company that offers impressive double-digit revenue growth with high and expanding margins.

We believe that Azure is the centerpiece of the new Microsoft. Even though we estimate it is already an approximately $7 billion business, it grew at a staggering 92% rate in fiscal 2018. Azure has several distinct advantages, including that it offers customers a painless way to experiment and move select workloads to the cloud. Since existing customers remain in the same Microsoft environment, applications and data are easily moved from on-premises to the cloud. Microsoft can also leverage its massive installed base of all Microsoft solutions as a touch point for an Azure move. In addition, Azure is an excellent launching point for secular trends in artificial intelligence, business intelligence, and Internet of Things as it continues to launch new services centered on these broad themes.

Omnicom Returned to Strong Organic Growth Accompanied by Margin Expansion; Maintaining $85 FVE
by Ali Mogharabi | Morningstar Research Services LLC | 02-12-19

Omnicom reported better than expected fourth-quarter 2018 results driven by strong organic growth in North America alongside some cost control that led to year-over-year margin expansion. Management guided for further organic growth in 2019 but expects no growth in operating margin. We did not make any significant changes to our estimates and are maintaining our $85 per share fair value estimate on Omnicom. We view the narrow-moat Omnicom shares attractive as the stock is currently trading at only a 0.87 price/fair value estimate, which places it in 4-star territory. In addition, Omnicom's 8.3% announced increase in dividend per share for 2019 pushed the firm's dividend yield to 3.5%.

Total revenue of $4.09 billion was down 2.2% from last year as the impressive 3.2% organic growth was more than offset by the negative 2.4% and negative 2% impact of net divestitures and foreign exchange rates, respectively. Fourth-quarter organic growth of 2.5% in North America (with 2.6% in the U.S.) improved for the second consecutive quarter after disappointing declines in the previous three quarters. Drivers behind the year-over-year 270 basis point improvement included the completion of more projects and steady growth in revenue from advertising, media, healthcare, and public-relations agencies in the U.S. We expect organic growth in North America to continue in 2019, driven by media account wins of the U.S. Army and Daimler AG, along with wins on the creative side, with Ford and Dunkin'.

Pepsi's Pricing Strengthens in 4Q and Should Be Supported by Heightened Brand Investments
by Sonia Vora | Morningstar Research Services LLC | 02-15-19

PepsiCo reported solid fourth-quarter results, with 4.6% organic revenue growth driven by a 4% increase in effective net pricing, which represented an acceleration from the roughly 2% rate in the first half. Pricing increased in five of its six operating segments, excluding Quaker Foods North America (just 4% of sales), where it remained flat, which we attribute to industrywide weakness in the center of store. We think this shows that the firm's brand intangible assets, which underscore our wide moat rating, remain healthy. Operating margin contracted 70 basis points to 12.5%, largely due to commodity cost inflation, which has been weighing on firms across the food and beverage space. On a full-year basis, organic sales grew 3.7% (exceeding our 3% estimate) and operating margin stood at 15.6% (around 70 basis points below our estimate), leading to core earnings per share of $5.66 (comparable to our expectations). As such, we don't anticipate a material change to our $122 fair value estimate or longer-term forecast for around 3% sales growth (with around two thirds of these gains driven by pricing) and high teens operating margin on average.

We appreciate Pepsi's plan to strengthen investments in advertising and marketing, manufacturing, and the supply chain in 2019, which should help ensure that its brands align with evolving consumer tastes while allowing for improving profitability over the long run. In particular, we expect improving performance in the North American beverage business (33% of sales) as the firm bolsters investments in core brands, increases its pace of innovation, and enhances execution at a local level. While this segment was challenged in the first half of the year, posting low-single-digit volume declines, we've been pleased to see sequential improvements in pricing (up 3% in the fourth quarter) as the firm has ramped up marketing expenditures behind key brands like Pepsi and Mountain Dew.


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.

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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