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Optimism about a soft landing and slowing interest rate hikes spurred a market rally. The Morningstar Wide Moat Focus Index started the year with its strongest January since inception.
U.S. stock market indices started off the year notably strong as investors were quick to put a bruising 2022 in the rearview. Confidence that interest rates may be nearing their ultimate level and increasing probability of a soft-landing for the economy has boosted stocks, particularly growth segments of the market. The technology focused Nasdaq Composite Index jumped nearly 11% in January, its best start to a year since 2001. However, some would caution that there is still some ways to go in bringing inflation down to the Federal Reserve’s target range and that the current market narrative could prove to be a bit rosy.
The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) also started the year off strong—its strongest start to a new year ever, actually—with its best January since its inception in 2007. The Moat Index was up 11.8% for the month, outpacing the S&P 500 Index and even the Nasdaq Composite Index, which returned 6.3% and 10.7% during the same period, respectively.
The Moat Index’s outperformance in January, relative to the S&P 500 Index, was driven primarily by strong stock selection. This should not be a surprise to the studious readers of this blog, as stock selection has often been highlighted as a notable contributor to relative performance for the Moat Index. This phenomenon is owed to Morningstar’s forward-looking and rigorous equity research process, fueled by over 100 analysts, which plays a major role as the inputs driving the investment selections of the Moat Index. Details on the specific companies driving performance during the month are noted in the tables below.
| Top 5 Moat Index Contributors in January | |||
| Company | Ticker | Average Weight (%) | Return Contribution (%) |
| MercadoLibre Inc. | MELI | 2.68 | 0.94 |
| Salesforce Inc. | CRM | 2.52 | 0.64 |
| TransUnion | TRU | 2.48 | 0.60 |
| Meta Platforms Inc. Class A | META | 2.50 | 0.56 |
| The Walt Disney Co. | DIS | 2.34 | 0.54 |
| Bottom 5 Moat Index Contributors in January | |||
| Company | Ticker | Average Weight (%) | Return Contribution (%) |
| Emerson Electric Co. | EMR | 2.55 | -0.17 |
| 3M Co. | MMM | 2.35 | -0.10 |
| Kellogg Co. | K | 1.13 | -0.05 |
| Gilead Sciences Inc. | GILD | 1.50 | -0.04 |
| Zimmer Biomet Holdings Inc. | ZBH | 2.45 | 0.00 |
Source: Morningstar, January 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.
Wide Moat Stock Highlights: MELI Leads, AAPL Joins Universe
MercadoLibre Inc. (MELI)1
MercadoLibre Inc. runs the largest e-commerce marketplace in Latin America, connecting a network of more than 140 million active users and over 1 million active sellers across an 18-country footprint. The company also operates a host of complementary businesses, with shipping solutions, a payment and financing operation, advertisements, classifieds and a turnkey e-commerce solution rounding out its arsenal. MELI generates revenue from final value fees, advertising royalties, payment processing, insertion fees, subscription fees and interest income from consumer and small-business lending. Morningstar attributes MELI’s wide moat rating to their strong network effect, driven by a large pool of users on both sides of the marketplace (buyers and sellers), which encourages even more users to join the platform. This creates a positive feedback loop of better product selection, lower costs and greater user participation.
MELI was the top contributor to performance for the Moat Index in January following supportive forecasts for the e-commerce segment and reports of continued user growth on the platform. MELI’s share price gained nearly 40% in January to end the month at about $1,150 per share, which puts the stock right at Morningstar’s current estimate of fair value after having traded at a discount since the end of 2021.
Apple Inc. (AAPL)2
Apple Inc., the well-known designer of a wide variety of popular consumer electronic devices and services, including smartphones (iPhone), tablets (iPad), PCs (Mac), smartwatches (Apple Watch) and AirPod, deserves a highlight, as Morningstar just recently upgraded the company’s economic moat rating from narrow to wide. This means that after years of being ineligible for the Moat Index, due to its narrow moat rating, Apple is now joining the eligible universe of wide moat companies that can be selected for inclusion in the Moat Index. Morningstar’s reasoning for the upgrade is noted below.
Morningstar Analyst Note: Abhinav Davuluri, CFA, Strategist, 20 Jan 2023
We are upgrading our economic moat rating for Apple to wide from narrow, as we have greater confidence in the firm’s competitive advantages stemming from high customer switching costs, intangible assets, and network effects associated with its iOS ecosystem. We believe switching costs from iOS are as strong as ever thanks to more auxiliary products and services that make switching away from iOS more difficult over time. Regarding intangible assets, Apple’s differentiated user experience via iOS coupled with its expertise in hardware, software and now semiconductor design allows the firm to build vertically integrated products more seamlessly. We also see network effects around iOS and its 1 billion-plus installed base with new app development favoring iOS.
While AAPL is now eligible for the Moat Index, to actually be selected for inclusion, it must also clear the hurdle of valuation, as only the top 40 most attractively valued U.S. wide moat companies make the cut each quarter. With Apple currently trading near Morningstar’s $150 estimate of fair value, it may be a bit longer before the popular consumer electronics company makes its first appearance in the Moat Index.
VanEck Morningstar Wide ETF (MOAT) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.
Small- and mid-cap moat stocks also had a strong start to the year, with the Morningstar US Small-Mid Cap Moat Focus Index actually outpacing the Morningstar Wide Moat Focus Index in January. VanEck Morningstar SMID Moat ETF (SMOT) provides exposure to small- and mid-cap companies with sustainable competitive advantages and attractive valuations.
Important Disclosures
1 2.95% of the Moat Index as of 1/31/2023.
2 0.00% of the Moat Index as of 1/31/2023.
Source for all data unless otherwise noted: Morningstar.
Fair value estimate: the Morningstar analyst’s estimate of what a stock is worth. Price/Fair Value: ratio of a stock’s trading price to its fair value estimate.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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