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
Hare Trades-New Buys ADBE, ADSK, CRM, ECL, Exited RBLX, LYFT, Added to DIS, SCHW, Trim UNH, ENB
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. In this trade alert, all mentions of "the Hare" refer to Morningstar, Inc.'s portfolio.

From the Hare portfolio managers:


Yesterday, we made the following trades in the Hare portfolio:

-- Bought 36 shares of Adobe ADBE at $281.71 per share (new 1.2% position).
-- Bought 67 shares of Salesforce CRM at $150.01 per share (new 1.2% position).
-- Bought 53 shares of Autodesk ADSK at $191.84 per share (new 1.2% position).
-- Bought 69 shares of Ecolab ECL at $148.38 per share (new 1.2% position).
-- Added 113 shares of Charles Schwab SCHW at $73.44 per share (new weight ~3.5%).
-- Added 110 shares of Walt Disney DIS at $99.29 per share (new weight ~3.5%).
-- Sold 23 shares of UnitedHealth UNH for $514.60 per share (new weight ~3.3%).
-- Sold 319 shares of Enbridge ENB for $38.50 per share (new weight ~5.6%).
-- Sold all 600 shares of Roblox RBLX for $38.34 per share.
-- Sold all 414 shares of Lyft LYFT for $14.51 per share.

After these trades, the portfolio's cash weighting declined to approximately 2.7%.

We established a position in Adobe as the valuation has become more attractive to us in recent weeks. Adobe has a strong competitive position in digital content creation software. Its Photoshop and Illustrator solutions are offered as a part of Creative Cloud, its suite of bundled subscription services. Adobe has a history of adding products and features through internal development and acquisitions with the goal of becoming a must-have comprehensive portfolio of digital software tools. The shares are down 51% year to date as a part of the broader selloff in high-growth technology stocks. Adobe’s recently announced acquisition of Figma, a collaboration software company, for around $20 billion was received poorly by the market. While we view the price tag as very expensive, we believe that this deal should enhance Adobe’s competitive position and long-term growth prospects and that the market has overreacted to this news. Figma has carved out a potentially valuable position as a platform to distribute software including Photoshop and Illustrator, and Adobe was willing to pay a very high price for a software solution from this disruptive firm. To date, the post announcement decline in the market value of Adobe shares is much greater than the price paid for Figma. The Morningstar Equity Research group’s fair value estimate is $450 per share. The shares trade at a price/earnings ratio of approximately 21, using Bloomberg consensus adjusted EPS estimates for fiscal 2022 (ending November). We believe Adobe is capable of delivering double-digit earnings per share growth over the next five years.

Salesforce.com is a leading player in sales, customer service, and marketing software. The company was first to offer software as a service over 20 years ago. The durability of revenue growth, especially for its core Sales and Service Cloud software, has been impressive. Salesforce has been active in acquiring other firms over the past decade with the goal of building a more comprehensive suite of front-office software. The price paid for some recent acquisitions, especially Slack, strikes us (and other investors) as expensive. Salesforce has responded to this investor concern by authorizing share repurchases and placing a greater emphasis on profitability. Management has invested heavily in sales and marketing (and M&A) over the past decade, which has helped fuel top-line growth but kept operating profit margins below those of other large enterprise software peers. We think the company’s long-term profitability has room to improve. The shares have sold off about 42% year to date and now trade at a price/earnings ratio of approximately 32 using Bloomberg consensus adjusted EPS estimates for fiscal 2023 (ending January). We view this as a reasonable multiple to pay, given that we think that Salesforce can generate at least double-digit EPS growth over the next five years. The shares trade at a meaningful discount to Morningstar Equity Research group’s $240 fair value estimate

Autodesk was one of the first companies to create and sell computer-aided design software when it released the first version of flagship product AutoCAD in the 1980s. Since then, it has become a global leader in CAD software for architecture, construction, product design, manufacturing, and various other use cases. We believe Autodesk’s software has a defendable moat because CAD software takes a long time to master, which makes Autodesk’s user base very unlikely to switch to a new provider. Additionally, students looking to break into the industry must learn Autodesk’s software to get hired by a client of Autodesk. This makes it very difficult for competitors to displace Autodesk, because both future and current CAD users have an incentive to stick with Autodesk’s software. Autodesk is wrapping up a business model transition from selling perpetual or multiyear licenses to an annual billing SaaS model. This transition has hurt its financial performance in the short term but should allow for more consistent and less cyclical performance going forward. Growth in the global construction market and increased pricing should help drive double-digit earnings growth over the next five years. Autodesk is down roughly 43% from its fall 2021 highs. At the current price, Autodesk trades at a price/earnings multiple of around 29 times current-year analysts’ consensus earnings estimate. We believe this is a reasonable valuation for a wide-moat, high-margin software business. The price also implies a substantial discount to the Morningstar Equity Research group’s fair value estimate of $230 per share.

Ecolab is the global leader in water, hygiene, and infection-prevention solutions and services, operating in more than 170 countries. The company serves customers in the food, healthcare, hospitality, and industrial markets, helping them to advance food safety, maintain clean and safe environments, optimize water and energy use, and improve operational efficiencies and sustainability. We like that the firm provides such essential services to its customers. While Ecolab suffered from the unusual fallout from the COVID-19 pandemic and then soaring inflation, we believe it should continue its recovery and deliver steady and robust growth for years to come, consistent with its longer-term history. Our confidence stems from Ecolab’s competitive advantages, including its unmatched scale, global reach, record of technological innovation, and customer switching costs. These should allow the company to push through price increases and win new business in its large and expanding market. We also see scope for improved profitability. After about a 38% drop from its high last November, we initiated a 1% position. The stock now trades for around 31 times analysts’ consensus estimates for current-year adjusted earnings (as compiled by Bloomberg) and 26 times next year’s estimates. Importantly, we see potential for this enduring wide-moat business to deliver double-digit earnings growth for several years thereafter. The stock also trades at a substantial discount to Morningstar Equity Research group’s $215 fair value estimate.

Both Charles Schwab and Disney are attractively priced and worthy of higher weightings in the portfolio. Our views on these businesses have not changed since we provided rationale for establishing a position in Schwab and adding to Disney in June. We like the diversification that Schwab brings to this portfolio. The firm’s future earnings growth is leveraged to higher interest rates and rising client asset levels. And we continue to believe Disney is set up for continued long-term success in the video streaming business, thanks to valuable content from the likes of Disney, Marvel, Pixar, ESPN, and Fox. The Morningstar Equity Research group’s fair value estimates for Schwab and Disney are $84 and $170, respectively.

We trimmed our position in UnitedHealth. The decision was based on relative valuation and portfolio management considerations. The shares have performed well and provided some defensive exposure for the portfolio, given the noncyclical nature of the company’s revenue. However, the current valuation has become less attractive. While Morningstar Equity Research group’s $402 fair value estimate strikes us as too conservative, the current valuation has become less attractive, especially relative to other stocks in the portfolio and to our new additions. We're also mindful of the portfolio's overall exposure to the healthcare insurance industry, given our position in peer Elevance Health ELV as well as our small position in CVS Health CVS, a diversified healthcare firm that owns an insurance business. We maintain a positive view on the firm’s strong competitive position in the U.S. healthcare system. An aging population, cost controls, and expansion of the Medicare Advantage and Optum businesses should continue to drive earnings growth. Five-year expected annual EPS growth using Bloomberg consensus estimates is 12%.

We also trimmed our position in Enbridge. As the owner and operator of some of the most critical energy infrastructure in North America, Enbridge tends to produce relatively predictable results. Growth, however, is not particularly robust. Distributable cash flow per share is expected to grow at 5%-7% for the next several years, far below the 10% growth rate we generally target for a Hare holding. Given uncertain economic conditions and volatile financial markets, investors have been willing to place a premium on businesses with predictable and stable results, even ones with modest growth potential. We’ve seen this borne out in Enbridge’s share price performance, where total return has been ahead of broader markets over the last couple of years. The relative outperformance has been a bright spot in the Hare portfolio. Capital preservation, or a defensive ballast, was a large part of the reason for Enbridge’s inclusion in the Hare portfolio. Now that the position has performed as expected, we are reducing our weight in favor of what we think are better opportunities in the stocks of more traditional growth companies. We expect Enbridge to continue to produce predictable and stable results, and we continue to be optimistic on its absolute share price performance potential.

We sold out of our Roblox position. We originally viewed the company as a potentially very valuable platform for video games, social networking, and a virtual world all rolled into one. Roblox is a young business that has a large addressable market, but it’s inherently hard to handicap future financial results, given the fickleness of youth gaming trends. Ultimately, we became less comfortable with Roblox based on the wide range of potential outcomes that we believe skew negatively, considering the stock’s lofty relative valuation of 10 times their trailing 12 months sales. Given that we are selling the position at a material loss, it’s fair to say that we did not cover ourselves in glory with this investment. With the benefit of hindsight, our enthusiasm for the growth potential of this business model led us to pay too high a price. Morningstar Equity Research group’s estimate of fair value for Roblox is $75 per share. While that price is possible, given the wide range of possible outcomes for the company, it isn’t one we view as most probable. We’ve added new positions in four companies that we view as having solid growth prospects with more-established business models and more-predictable cash flows.

We sold the portfolio's relatively small position in Lyft. While the stock has potential upside from the current price (there have been recent buyout rumors), we have concerns about the company’s competitive position. We also needed to fund the new Hare purchases. When Lyft was purchased, we recognized it was a stock with a wider range of potential outcomes than we would normally buy. With the benefit of hindsight, we should not have paid so much for an unproven company with a stronger rival like Uber UBER. In our view, the four new stocks purchased offer nice upside in businesses with strong growth profiles and fewer competitive question marks than Lyft. The Morningstar Equity Research group’s fair value estimate for Lyft is $65 per share, which we view as far too optimistic, given the company’s challenges.

Regards,

Michael Corty, CFA
George Metrou, CFA
John Owens, CFA
Nabil Salem, CFA

Portfolio Managers, Hare Strategy
Morningstar Investment Management LLC

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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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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.

The Morningstar Rating for Stocks is a forward-looking, analyst-driven measure of a stock's current price relative to the analyst's estimate of what the shares are worth. Stock star ratings indicate whether a stock, in the equity analyst's educated opinion, is cheap, expensive, or fairly priced. To rate a stock, an analyst estimates what he or she thinks it is worth (its "fair value"), using a detailed, long-term cash flow forecast for the company. A stock's star rating depends on whether its current market price is above or below the fair value estimate. Those stocks trading at large discounts to their fair values receive the highest ratings (4 or 5 stars). Stocks trading at large premiums to their fair values receive lower ratings (1 or 2 stars). A 3-star rating means the current stock price is fairly close to the analyst's fair value estimate. Morningstar’s analysts are employed by Morningstar, Inc. or its subsidiaries and its equity analysts are collectively referred to as “Morningstar’s Equity Research group". 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.

Unless otherwise noted, data included in this alert is taken from the subject company's reports or other public materials.

The Hare portfolio managers own some of the Hare stocks in their 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

Michael Corty, CFA, is the Head of U.S. Equity Strategies and a Portfolio Manager within Morningstar's Investment Management group. He is the lead portfolio manager for Tortoise and Equity Income strategies. Michael joined the group as a portfolio manager in December 2013.

Previously, he was a senior equity analyst in Morningstar, Inc.'s equity research department where he also served as a voting member of the economic moat committee. Michael holds a bachelor's degree from Loyola Marymount University and an MBA from Johnson Graduate School of Management at Cornell University.

John Owens, CFA, is a Senior Portfolio Manager within Morningstar's Investment Management group. He is a member of the Select Equity Portfolio team and lead manager for All-Cap Equity and Small/Mid-Cap Equity strategies. John joined the group as a portfolio manager in January 2009.

Previously, John was a senior equity analyst and investing specialist within Morningstar, Inc.'s equity research department. He holds a bachelor's degree in accounting from Oklahoma State University and an MBA from the University of Texas at Austin.

George Metrou, CFA, is a Portfolio Manager within Morningstar's Investment Management group. He is a member of the Select Equity Portfolio team and lead manager for the Dividend strategy. George joined the group as a portfolio manager in 2018.

Prior to joining Morningstar Investment Management, George was the Director of Research and a Portfolio Manager at Perritt Capital Management and a Portfolio Manager at Windgate Wealth Management. George holds a bachelor's degree from DePaul University where he majored in Finance.

Nabil Salem, CFA, is an Associate Portfolio Manager within Morningstar's Investment Management group. He is a member of our Select Equity Portfolio team and took over as the lead manager for the International Equity ADR strategy in 2022 after serving as a co-portfolio manager on the strategy from 2021.

Previously, Nabil was an associate portfolio manager within the Investment Management group's multi-asset team where he served as the asset class lead for emerging markets research. He joined Morningstar, Inc. in 2013. Nabil holds a bachelor's degree in Economics and Finance from Washington University in St. Louis and an MBA from the University of Chicago Booth School of Business.

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.