Morningstar Advisor - April/May 2011 - (Page 66)

Screens Healthy, Wealthy, and Wide By RJ Towner Here’s a screen that sniffs out wide-moat health-care firms that the market hasn’t picked up on yet. With the stock market on a tear, finding undervalued stocks with large margins of safety is becoming increasingly difficult. Health care, specifically large-cap pharmaceuticals, have lagged behind consumer goods and basic materials, however. Fears of weak pipelines and patent cliffs have prevented shares from participating in the rally, but Morningstar’s analysts think that several great companies in the sector still look undervalued. (See Sector Rap on Page 32.) ogy stocks to long-established titans of business. an assurance that the business is unlikely to fail anytime soon. And Morningstar Rating . 3 And Dividend Yld % Current . 3 Our goal is to focus on companies with large margins of safety, so our screen will focus on companies rated at least 4 stars, which implies a fairly significant discount to Morningstar analysts’ fair value estimates. In addition to finding discounted stocks, we can limit the screen to companies that will provide solid income while the uncertainty surrounding these companies clears up. And Free Cash Flow Year 1 . 3% And Sector 5 Health care Economic Moat 5 Wide We begin the screen by focusing in on health-care companies. Firms in the health-care sector range from small speculative biotechnol- The next step is to focus on companies that have sustainable competitive advantages, which can range from patents, to brands, to sheer size and scale. Wide moats are generally Free cash flow is quite literally the amount of cash left over after everyone, including shareholders, is paid off. A company generating significant free cash flow can provide returns to shareholders via dividend increases, share buybacks, or strategic acquisitions. 66 Morningstar Advisor April/May 2011

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2011

Morningstar Advisor - April/May 2011
Letter From the Editor
The Debate That Matters Most
What Can the Mutual Fund Industry Do Better?
Cool Logic, Warm Intent
How to Start a Mutual Fund
Owner and Operator
Middle East Revolts Roil Oil Markets
Four Picks for the Present
Investment Briefs
How We Improve Our Odds of Picking Outperformers
Health Care Survived 2010, but Investors Want Proof
The Global Fund-Leadership Playoffs: Europe vs. the United States
U.S. Fund Investors Have It Good
U.S. Fund Firms Learn to Speak UCITS
Balancing Act
The Tamer Ride
Investors Lend a Hand
Healthy, Wealthy, and Wide
Foreign Funds That Win at Concentration
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VAs Finish 2010 With a Solid Gain
Buying Good Funds, Poorly

Morningstar Advisor - April/May 2011