Marrying the ‘best’ stocks with the best ‘value’

In a bear market such as we are experiencing now, you may be looking for bargains to buy. If you’re searching online for “best stocks to buy now,” you’ll find countless offerings. How do you judge the postings?

Before going any further, any article about “stocks to buy” is merely a starting point for further research, nothing else. Never assume more than that.

Let’s look at an article together: “The 10 Best Companies to Invest in Now: The undervalued stocks of high-quality companies are compelling investments today” (tinyurl.com/2ts6mwn7), posted on July 5, 2022, on the website of Morningstar, a U.S. financial services firm, and written by Susan Dziubinski.

There is a lot to like here, since the article gives you more than just names of stocks. The “more” is explanatory information that helps put the listed stocks into context.

First, there is an explanation of the thinking behind why the stocks are included in the list. “During uncertain times, investors may want to own companies that offer some sense of certainty in terms of cash flows and company fundamentals,” Dziubinski writes.

A link to “The Best Companies to Own: 2022 Edition” (tinyurl.com/ 2p92kyu8), also on the Morningstar website and written by Margaret Giles, incorporates a discussion of the rationale for choosing these stocks, along with an important warning: “We aren’t advocating that you buy shares of every company on this list today. Even the greatest company can be a bad investment if you overpay. The share prices of many companies on this list overestimate their real value, so it may not be the right time to buy. Still, we believe these companies are essential for any stock investor’s watchlist.”

But that’s not all. As the first article points out: “(T) he best firms aren’t always the best stocks to buy at a given point in time. How much an investor pays to own a company — best or otherwise — is important, too.”

Marrying the two lists gives you the 10 most undervalued stocks from the “best companies to own” list. That provides you 10 stocks to research further.

Dziubinski offers important links to additional material, such as Morningstar’s “Guide to Stock Investing” (tinyurl.com/ya6tjjvb), also by Dziubinski, which I would think of as the basic, must-read manual that precedes everything. Here are a few highlights. Morningstar’s approach is “having an intimate knowledge of the company’s sustainable competitive advantages, determining what its shares are worth, and then only buying the stock when there’s a significant margin of safety in doing so.”

Morningstar rates stocks based on “fair value” compared to the stock’s current price. A four- or five-star rating means the stock is undervalued; three stars indicates a fairly valued stock; one or two stars points to the stock being overvalued. The idea is that stocks that are undervalued are better buys.

Morningstar also has a rating for “Economic Moat.” That’s the firm’s view of a company’s competitive advantages and how well and how long the company can stay ahead of its competitors and earn high returns.

In the Morningstar system, if a company is viewed as having competitive advantages that are expected to last more than 20 years, it has a wide moat. If the time period of advantages is short, the company has no moat at all. A wide moat is better.

With any system you use for investing in stocks, be sure you understand the thought process behind the recommendations, and how it meshes (or doesn’t) with your approach to (and knowledge of ) investing. From there, choose wisely, but only after doing your own research.

This is just one example of how a firm might come up with a list of stocks to buy. I like the approach taken here for a reason: It gives you a list to consider, the rationale behind the composition and resources for further research.

(By the way, I subscribe to many research services, Morningstar being one of them.)

Seasoned Investment Counsel and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients),” published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.