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Morningstar lists the 11 'superior foreign stocks' is says are cheap and boast a competitive edge that will last for years to come

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Summary List Placement

Global equities have been on the rise this week, overshadowing market fears over COVID-19 case flare-ups. Morningstar's stock picking team has reaffirmed the value of several big names that it bills as "superior foreign stocks" that it believes are undervalued right now. 

In the past month, Morningstar added eleven of what it says are "interesting and inexpensive" international stocks to its Global Markets ex-US Index. While all of the stocks are foreign, they are also listed on US exchanges, thus making it easier for domestic investors to access them. Four of the companies are based in the United Kingdom, five others are from elsewhere in Europe and two are based in Asia.

European banks are a prominent fixture on the list. Corporate earnings season began last week for the continent's biggest names, with analyst consensus projecting a 140% year-on-year increase in earnings per share for the second quarter, according to Factset data aggregated in a separate note by Bank of America's European equity quant strategy team.

European bank earnings estimates are also "surging on lowered credit-risk fears, with the net balance of monthly EPS [earnings per share] hikes vs. downgrades at a four-year high," according to Bloomberg. 

The Morningstar research team also said the equities all shared the ability to "fend off competition and outearn" their capital costs for years to come. Each company has been ranked as a "wide-" or "narrow-moat" stock, based on its lowest price/fair value.

It was legendary investor Warren Buffett that originally coined the term "economic moat", basing it on the image of the body of water protecting a medieval castle. The wider the moat, the harder it is for an invader to get across.

Morningstar has identified five sources of a moat: 

  • "Switching costs are those obstacles that keep customers from changing from one product to another
  • The network effect occurs when the value of a good or service increases for both new and existing users as more people use that good or service
  • Intangible assets are things such as patents, government licenses, and brand identity that keep competitors at bay
  • A company with a cost advantage can produce goods or services at a lower cost, allowing them to undercut their competitors or achieve higher profitability
  • Efficient scale benefits companies operating in a market that only supports one or a few competitors, limiting rivalry"

Timescale ultimately determines whether Morningstar dubs a company as a wide or narrow economic moat.

"A company whose competitive advantages we expect to last more than 20 years has a wide moat; one that can fend off their rivals for 10 years has a narrow moat; while a firm with either no advantage or one that we think will quickly dissipate has no moat," Morningstar said. 

Here are the top picks: 

Anheuser Busch InBevInsider

  1. Ticker: BUD

Morningstar rating: 4 out of 5 stars 

Morningstar economic moat rating: Wide 

Country: Belgium 

Analysis:

Anheuser-Busch InBev reported a strong first quarter that beat the research firm's estimates on volume and revenue. Morningstar still sees upside for the company's shares and thinks margin expansion next year could reassure investors that deleveraging will continue organically.

(Source: Morningstar on 06/05/21) 



Banco Santander SAInsider

2. Ticker: BSBR

Morningstar rating: 4 out of 5 rating 

Morningstar economic moat rating: Narrow 

Country: Spain

Analysis:

Santander offers investors a combination of emerging-markets and developed-markets banking exposure. Morningstar says Santander could boost its profitability, release capital, and rerate its valuation by trimming its portfolio to operate only in areas where it has a clear competitive advantage.

(Source: Morningstar)



HSBC HoldingsInsider

3. Ticker: HBCYF

Morningstar rating: 4 out of 5 rating 

Morningstar economic moat rating: Narrow

Country: United Kingdom 

Analysis:

"​​As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank's pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense."

(Source: Morningstar on 27/04/21)



ING Groep NVInsider

4. Ticker: ING

Morningstar rating: 4 out of 5 rating 

Morningstar economic moat ranking: Narrow

Country: Netherlands 

Analysis:

"We believe ING and Banco Bilbao Vizcaya Argentaria are especially well-placed given their high levels of surplus capital. We calculate that both are in a position to return close to 20% of their net asset values to shareholders via dividends and buybacks in the near- to medium term."

(Source: 06/06/21)



Lloyds Banking Group PLCInsider

5. Lloyds Banking Group PLC

Ticker: LLDTF

Morningstar rating: 4 out of 5 stars 

Morningstar economic moat ranking: Narrow 

Country: United Kingdom 

Analysis:

The UK's Prudential Regulation Authority has removed all capital distribution restrictions on large banks, which Morningstar said supported its view that Barclays, Lloyds, and NatWest are adequately capitalized. 

(Source: Morningstar on 13/07/21)



See the rest of the story at Business Insider

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