Morningstar Advisor - August/September 2009 - 64

Screens Moats around Small Castles By Haywood Kelly Use this screen to suss out small firms with economic moats and great valuations. When pondering companies with economic moats, the names that typically come to mind are the blue chips, from Microsoft MSFT and Procter & Gamble PG on down. But Morningstar analysts actually cover several hundred small-cap stocks that have distinctive competitive advantages of one sort or another. All told, our analysts cover 900 small-cap stocks. Of those, 200 have Morningstar economic moat ratings of narrow or wide. Some names you or your clients might recognize include Blue Nile NILE (online seller of diamonds), Boston Beer SAM (maker of Samuel Adams), Clear Channel Outdoor Holdings CCO (billboard operator), Fair Isaac FIC (calculator of the ubiquitous FICO score), International Speedway ISCA (operator of Nascar race tracks), and Winne- bago Industries WGO (maker of recreational vehicles). But I hazard to guess that most of the small-cap firms that Morningstar covers have probably never crossed your radar screen. Yes, these companies tend to be riskier than the blue chips. And yes, small caps can get crushed in a deep recession like the one we’re muddling through. But some of the firms that Morningstar covers in the small-cap area are truly great companies. Some have wonderful growth prospects; some are potential takeover candidates; and some will simply keep chugging along in their narrow, but profitable niches for decades to come. Given the sometimes dirt-cheap valuations of these companies, Morningstar analysts have consistently found attractive buying opportunities. Equity Style Box 5 Small Cap For this issue’s screen, we first narrow in on companies with market caps below Morningstar’s official cut-off between smalland mid-cap firms, which is currently $1.6 billion. What kind of universe does this produce? The average market cap of small-cap companies in Morningstar’s U.S. equity database is $324 million (excluding pink-sheet stocks). The average daily trading volume is only about 430,000 shares, which contrasts with the 3-million-plus average for midcaps. As we’ve written about extensively in these pages, low-liquidity stocks offer a blessing and a curse. The curse is that trading costs are high—large bid-ask spreads and a decent likelihood that a single order can move the price. The blessing, according to 64 Morningstar Advisor August /September 2009

Morningstar Advisor - August/September 2009

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2009

Morningstar Advisor - August/September 2009
New on MorninstarAdvisor.com
Letter from the Editor
Contributors
Are We at the Beginning of a New Small-Cap Era?
At Home Around the World
Staying Nimble
Investment Briefs
Asia's Way Forward
MPT Put Through the Wringer
Recession Rallies' Sweet Spot
What Makes Small Caps Tick
The Trick to Small Caps
Value Hound
Four Picks for the Present
Signs of Stabilization in the Housing Industry
The Not-Ready-for-High-Yield Players
Moats Around Small Castles
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
The No in Innovation
Morningstar Advisor - August/September 2009 - Morningstar Advisor - August/September 2009
Morningstar Advisor - August/September 2009 - Cover2
Morningstar Advisor - August/September 2009 - 1
Morningstar Advisor - August/September 2009 - 2
Morningstar Advisor - August/September 2009 - 3
Morningstar Advisor - August/September 2009 - 4
Morningstar Advisor - August/September 2009 - 5
Morningstar Advisor - August/September 2009 - New on MorninstarAdvisor.com
Morningstar Advisor - August/September 2009 - 7
Morningstar Advisor - August/September 2009 - 8
Morningstar Advisor - August/September 2009 - Letter from the Editor
Morningstar Advisor - August/September 2009 - Contributors
Morningstar Advisor - August/September 2009 - 11
Morningstar Advisor - August/September 2009 - Are We at the Beginning of a New Small-Cap Era?
Morningstar Advisor - August/September 2009 - 13
Morningstar Advisor - August/September 2009 - At Home Around the World
Morningstar Advisor - August/September 2009 - 15
Morningstar Advisor - August/September 2009 - 16
Morningstar Advisor - August/September 2009 - Staying Nimble
Morningstar Advisor - August/September 2009 - 18
Morningstar Advisor - August/September 2009 - 19
Morningstar Advisor - August/September 2009 - Investment Briefs
Morningstar Advisor - August/September 2009 - 21
Morningstar Advisor - August/September 2009 - 22
Morningstar Advisor - August/September 2009 - 23
Morningstar Advisor - August/September 2009 - Asia's Way Forward
Morningstar Advisor - August/September 2009 - 25
Morningstar Advisor - August/September 2009 - 26
Morningstar Advisor - August/September 2009 - 27
Morningstar Advisor - August/September 2009 - 28
Morningstar Advisor - August/September 2009 - MPT Put Through the Wringer
Morningstar Advisor - August/September 2009 - 30
Morningstar Advisor - August/September 2009 - 31
Morningstar Advisor - August/September 2009 - 32
Morningstar Advisor - August/September 2009 - 33
Morningstar Advisor - August/September 2009 - 34
Morningstar Advisor - August/September 2009 - 35
Morningstar Advisor - August/September 2009 - Recession Rallies' Sweet Spot
Morningstar Advisor - August/September 2009 - 37
Morningstar Advisor - August/September 2009 - 38
Morningstar Advisor - August/September 2009 - 39
Morningstar Advisor - August/September 2009 - 40
Morningstar Advisor - August/September 2009 - 41
Morningstar Advisor - August/September 2009 - What Makes Small Caps Tick
Morningstar Advisor - August/September 2009 - 43
Morningstar Advisor - August/September 2009 - 44
Morningstar Advisor - August/September 2009 - 45
Morningstar Advisor - August/September 2009 - The Trick to Small Caps
Morningstar Advisor - August/September 2009 - 47
Morningstar Advisor - August/September 2009 - 48
Morningstar Advisor - August/September 2009 - 49
Morningstar Advisor - August/September 2009 - 50
Morningstar Advisor - August/September 2009 - 51
Morningstar Advisor - August/September 2009 - 52
Morningstar Advisor - August/September 2009 - Value Hound
Morningstar Advisor - August/September 2009 - 54
Morningstar Advisor - August/September 2009 - 55
Morningstar Advisor - August/September 2009 - Four Picks for the Present
Morningstar Advisor - August/September 2009 - 57
Morningstar Advisor - August/September 2009 - Signs of Stabilization in the Housing Industry
Morningstar Advisor - August/September 2009 - 59
Morningstar Advisor - August/September 2009 - 60
Morningstar Advisor - August/September 2009 - 61
Morningstar Advisor - August/September 2009 - The Not-Ready-for-High-Yield Players
Morningstar Advisor - August/September 2009 - 63
Morningstar Advisor - August/September 2009 - Moats Around Small Castles
Morningstar Advisor - August/September 2009 - 65
Morningstar Advisor - August/September 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - August/September 2009 - 67
Morningstar Advisor - August/September 2009 - 68
Morningstar Advisor - August/September 2009 - 69
Morningstar Advisor - August/September 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - August/September 2009 - 71
Morningstar Advisor - August/September 2009 - Undervalued Stocks
Morningstar Advisor - August/September 2009 - 73
Morningstar Advisor - August/September 2009 - 74
Morningstar Advisor - August/September 2009 - 75
Morningstar Advisor - August/September 2009 - Most Popular Variable Annuities
Morningstar Advisor - August/September 2009 - 77
Morningstar Advisor - August/September 2009 - 78
Morningstar Advisor - August/September 2009 - New at Morningstar
Morningstar Advisor - August/September 2009 - The No in Innovation
Morningstar Advisor - August/September 2009 - Cover3
Morningstar Advisor - August/September 2009 - Cover4
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