Morningstar Advisor - August/September 2012 - (Page 70)

Screens Stocks That Can Stand the Heat By Vincent Yu Use this screen to find companies able to withstand global volatility. With the European debt crisis, news of an economic slowdown in China, and the recent credit downgrades of several global financial institutions, investors are becoming increasing trepidation about the global economy. Combined with slow improvements in U.S. economic figures and the Federal Reserve’s tentative fears of inflation, it is increasingly difficult for investors to find stocks that provide safe, long-term returns to investors. In such an economic environment, we want to find companies whose business models are able to withstand such volatility. multiple will allow us to remove stocks that are trading at high premiums including high-growth stocks. Unlike a price/earnings ratio, however, price/cash flow is not as subject to different accounting methods such as depreciation accounting that appear in earnings figures. Cash flow better reflects a company’s ability to both generate and manage the cash they have on hand and, thus, its financial stability and prospects. environment, stocks with low uncertainty ratings can present greater safety to investors. With high uncertainty and slow global growth, it is important to find companies whose business models, management teams, and capital structures are able to withstand the risks that the global economy faces. And Economic Moat 5 Wide And Fair Value Uncertainty 5 Low Price to Cash Flow , 10 First, we look for stocks that trade at low price/ cash flow ratios. We used 10 times earnings as our cutoff. Similar to a price/earnings ratio, this Morningstar’s analysts judge the variability of the fair-value estimates they give stocks by looking at the range of sales, the operating leverage, the financial leverage, and the susceptibility to external news or actions that the company faces. Given the current economic Although we want stable, undervalued stocks, we also want to look for companies that are able to consistently generate returns on capital in excess of their cost of capital. Morningstar’s analysts look for five sources of a moat in protecting such excess returns: intangibles, cost advantage, switching costs, network effect, and efficient scale. A wide-moat company in particular is able to sustain its com- 70 Morningstar Advisor August/September 2012

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2012

Morningstar Advisor - August/September 2012
Letter From the Editor
How Much of the Behavior Gap Is Your Fault?
What’s Your View of the Muni-Bond Market?
A Balanced Life
How to Get to Know EMMA
A Strong, Robust Fund Business
Dividend Investing Abroad
Four Picks for the Present
Investment Briefs
Fund Expenses Through the Decades
Autos on Comeback Track
Lessons From the Muni-Bond Rebound
Municipal-Bond Landscape Shifts
Municipal Bonds 101
A Tale of Two Cities
Unraveling the Mysteries of Money
Small Companies Mean the World to Him
The Chinese Art Market and the Origin of Bubbles
The Myth of the Dumb Investor
Stocks That Can Stand the Heat
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The War on Savers

Morningstar Advisor - August/September 2012