Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Alex Morozov. He is Director of European Equity Research at Morningstar. Hello.
Alex Morozov: Hi, Holly.
Black: So, your equity team puts Star Ratings on stocks that you cover. And eagle-eyed investors would have noticed in the sell-off in the last few weeks a lot of those rating will have changed as the share prices have plunged or moved. Can you tell us a bit more about why the ratings change and what that tells us about a stock?
Morozov: Yeah, Holly. So, in the Morningstar methodology, the cheaper the stock is relative to our assessment of its intrinsic value, the more likely it's going to get higher number of stars. So, think about it as 5-Stars and 4-Stars are the stocks that an uncertainty adjusted basis trading at largest discounts to our assessment of their long-term cash flow generated intrinsic value. So, when markets collapse like they did back in March, a lot of our stocks that we cover started trading significantly below what we think that they are worth over a long time and as a result the number of 4 and 5-Stars has increased dramatically, probably the largest number in 4 and 5-Star stocks that we've had since back in 2009.
Black: So, as an investor if I hold a stock and then its rating changes, whether that's up or down, should I be concerned about that?
Morozov: Well, I suppose it depends on the reason why the rating has changed. If the rating has changed because the stock is now much more attractive from a long-term investment perspective, i.e., the intrinsic value has not changed but the stock has sold off or vice versa our analysts have increased their intrinsic value as a result the discount is larger, then as an investor you definitely want to look at those as opportunities.
On the flipside, if our analysts have lowered their intrinsic value to meet the stock price, that perhaps is not as good of a sign for investors. But ultimately, what you as an investor should look at is, you should look at the companies that trade at attractive discounts, that perhaps are higher quality, in the Morningstar methodology, those are the companies with economic moats, wide moats, narrow moats. Those are the companies that we think have durable competitive advantage and for long-term investors, they will provide with really stable franchises that could most likely do better in environments like today.
Black: So, what are a couple of your top ideas for stocks that have moved to more favourable ratings recently?
Morozov: Yeah, interestingly enough, this sell-off, well, not surprisingly, hit certain industries very hard. So, we have a number of attractive investment opportunities in the cyclical industries. What is a little bit more surprising is how many interesting opportunities we have now in the traditionally defensive sectors. For example, within the consumer defensive AB InBev is a 5-Star and it's a wide moat company. So, it's a very interesting opportunity. Within the healthcare space, companies like Bayer are trading at very material discount to intrinsic value, albeit Bayer has got some of its own issues, but nonetheless, it's a wide moat company and it's also a 5-Star stock.
For investors that still want to invest in wide moat companies but perhaps are a little bit more willing to take a little bit of a risk in terms of exposure to some certain cyclical industries, we have companies like Boeing and Airbus. Everybody knows the issues that the airlines are going to be facing. Everybody knows the concerns about the travel. But I think those are the companies that are really attractively priced, and you have an exposure to wide moat companies that rarely trade at a discount to intrinsic value like they are right now.
Black: Alex, thank you so much for your time. For Morningstar, I'm Holly Black.
