VanEck's Monthly MOAT Investing Update (August 2022) - Build a Better Core

August was a volatile month for stocks, as investors attempted to digest the renewed hawkish tone coming from the U.S. Federal Reserve (Fed). Fed Chair Jerome Powell addressed inflation challenges at the Jackson Hole conference with language reminiscent of former chair Paul Volcker. Powell iterated that higher rates for longer may be needed to bring inflation under control, despite greater recession risk. He even went as far as acknowledging that central bank policy may cause “some pain” to the U.S. economy in the near term. Major U.S. market indexes, which were initially up through the first half of August, crashed following these comments to end the month in negative territory.

The Morningstar Wide Moat Focus Index remains ahead of the S&P 500 index by 4% in 2022 (-12.1% vs. -16.1%, respectively), as of 8/31/2022. This is despite lagging the S&P 500 in August (-4.8% vs. -4.1%, respectively). The Moat Index’s outperformance so far this year has been driven by a combination of positive sector allocation and strong stock selection, particularly within the Consumer Staples and Healthcare sectors. However, for the month of August, it was selection effect within technology that drove underperformance relative to the S&P 500.

Source: Morningstar Direct

Wide Moat Stock Highlights

Gilead Sciences Inc. (GILD)

Gilead Sciences (GILD) is a drug manufacturer that develops and markets therapies to treat life-threatening infectious diseases, with the core of its portfolio focused on HIV and hepatitis B and C. Acquisitions over the last few years has helped broadened this focus to also include pulmonary and cardiovascular diseases and cancer. Morningstar attributes Gilead’s wide moat rating to their strong patent protection and expertise in infectious diseases and single-pill formulations. GILD was the top contributor to performance for the Moat Index in August following strong second-quarter earnings and increased sales guidance for the remainder of the year on strong HIV and oncology sales.

GILD’s share price gained over 6% in August to end the month just over $63 per share, while Morningstar currently estimates Gilead’s fair value to be $81.

3M Company (MMM)

The well-known large multinational conglomerate, with over 60,000 products in a variety of markets, was in the bottom contributors to performance for the Moat Index this month. 3M’s stock price was pressured following updated news on current product litigation the company is facing regarding liability suits alleging faulty earplugs. Morningstar believes the fears surrounding 3M’s litigations are responsible for the share’s current price discount to their estimate of fair value. However, despite the current legal troubles, there was no significant impact to Morningstar’s fair value estimate for 3M Company. Morningstar believes the company can still provide positive economic benefits based on its suite of innovative products and its wide economic moats centered on intangible assets and cost advantage.

3M Company’s share price declined 12% in August to end the month around $125 per share, while Morningstar estimates MMM’s fair value to be $183.

As a recap: 

VanEck Morningstar Wide Moat ETF (MOAT) -  Our flagship core U.S. equity ETF offering with over $6.7bn in assets. 

- The Morningstar Wide Moat Focus Index emphasizes on valuation by leveraging Morningstar’s robust equity research process to identify and target wide moat companies trading at attractive prices. As stagflationary risk increases, investors might want to position their portfolio with companies that have a wide MOAT (long-term sustainable competitive advantage) who are able to better weather the storm. 

- MOAT is a smarter approach to US equity investing. Targeting only wide MOAT rated companies, the focus on valuation opportunities, regardless of style, results in dynamic exposure to the areas of the U.S. equity market with the most opportunity. 

- Lastly, the index is equally-weighted and follows a forward-looking, large blend strategy with a current value tilt.