In this piece, we will take a look at 12 undervalued wide moat stocks to invest in. If you want to skip our primer on wide moat investing, then check out 5 Undervalued Wide Moat Stocks To Invest In.
The strategy of wide moat investing has gained a lot of traction over the past few years. This strategy is most commonly attributed to Warren Buffett of Berkshire Hathaway. Mr. Buffett prefers stocks that he believes have a wide economic moat. Moat is competitive advantage that a firm has, and this protects it against competitors in the long term. Firms that are believed to have a moat that protects them for more than 20 years are called wide moat firms while those whose moat protects them for less than 20 years but more than 10 years are called narrow moat stocks. We've covered economic moats and Mr. Buffett's history with this investment strategy in a lot of detail as part of our coverage of 13 Best Wide Moat Stocks To Buy According To Hedge Funds.
Naturally, as opposed to using financial metrics to segregate stocks, separating them based on their economic moats involves a lot of subjectivity. One popular yellow book of wide moat stocks that is relied on these days is Morningstar's economic moat rating. This rating criteria lists five factors that can be classified as an economic moat. These are switching costs, network effects, intangible assets, cost advantage, and efficient scale. Briefly exploring these, switching costs refer to the pain or monetary outflows that a customer might face when choosing a new product, network effects measure the value benefits to existing customers as more people use a product, while efficient scale measures a firm's market and the ability of new competitors to enter and increase the number of companies targeting the same revenue pie.
Looking at these criteria, it's also possible to a list of companies with wide economic moats. Take the example of Tesla, Inc. (NASDAQ:TSLA). Tesla is the world's largest manufacturer of electric vehicles. The global electric vehicle market was estimated to be worth $384 billion by 2022 end and is expected to sit at $500 billion by the end of this year. From then until 2030 it is projected to grow at a compounded annual growth rate (CAGR) of 17.8% to be worth $1.5 trillion by the end of the forecast period. Tesla's 2022 revenue was $81.4 billion, making it represent a large portion of the total industry.
Analyzing the firm's economic moat, there are few competitors that offer vehicles that are similar to Tesla's at least in the U.S. Other electric vehicle firms, such as Lucid Group, Inc. (NASDAQ:LCID), have higher priced alternatives and other options are either available in limited quantities or offer lower range. When it comes to network effects, the more people that buy a Tesla, the larger the firm's charging network becomes which then increases the areas that the car can travel to. Tesla is also offering its charging infrastructure to other EV companies, which further expands its coverage. In terms of intangible assets, the firm's self driving platform is one of the strongest in the market, and the high costs of setting up manufacturing units and efficiently scaling up production also provide Tesla with a competitive advantage as new entrants often struggle and take years to mass produce vehicles. Of course, Tesla isn't the strongest example of a stock with a wide moat, but it does have some crucial advantages that set it apart from the pack. Morningstar, for its part, believes that Tesla is a narrow moat stock and some of the firms that it classifies as those with wide moats are NVIDIA Corporation (NASDAQ:NVDA) and Microsoft Corporation (NASDAQ:MSFT).
Apart from an economic moat, another way one can select stocks is to see if they are overvalued or undervalued. This is done by determining a fair price for the shares and then comparing it with the trading price. If the trading price is lower than the presumed fair value then the shares are undervalued and vice versa. If you're interested in undervalued stocks, then check out 15 Undervalued Cyclical Stocks To Buy Now.
So what are some undervalued wide moat stocks? We took a look and some top picks are The Walt Disney Company (NYSE:DIS), Etsy, Inc. (NASDAQ:ETSY), and Zimmer Biomet Holdings, Inc. (NYSE:ZBH).
12 Undervalued Wide Moat Stocks To Invest In
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Our Methodology
To compile our list of undervalued wide stocks to buy, we took a look at the top 30 holdings of the VanEck Morningstar Wide Moat ETF and calculated their share price upside based on the average analyst share price target. Out of these, the top 12 undervalued wide moat stocks to invest in are as follows.
Teradyne, Inc. (NASDAQ:TER) is a technology firm that provides chip companies with the machines to test their products. Despite a slowdown in the chip sector, the firm has beaten analyst EPS estimates in all four of its latest quarters and the stock is rated Buy on average.
During Q2 2023, 41 out of the 910 hedge funds part of Insider Monkey's database had held a stake in Teradyne, Inc. (NASDAQ:TER). Out of these, Israel Englander's Millennium Management is the firm's biggest investor since it owns 1.6 million shares that are worth $182 million.
Just like Etsy, Inc. (NASDAQ:ETSY), The Walt Disney Company (NYSE:DIS), and Zimmer Biomet Holdings, Inc. (NYSE:ZBH), Teradyne, Inc. (NASDAQ:TER) is an undervalued wide moat stock to invest in.
Gilead Sciences, Inc. (NASDAQ:GILD) is one of the largest pharmaceutical companies in the world. The firm was in for some bad news in August as the Food and Drug Administration (FDA) paused enrollment in its trial of a blood cancer drug.
By the end of this year's second quarter, 56 out of the 910 hedge funds polled by Insider Monkey had invested in the firm. Gilead Sciences, Inc. (NASDAQ:GILD)'s largest hedge fund shareholder is Peter Rathjens, Bruce Clarke, and John Campbell's Arrowstreet Capital courtesy of a $684 million stake.
10. International Flavors & Fragrances Inc. (NYSE:IFF)
Average Share Price Target: $79.41
Share Price Upside: 20%
International Flavors & Fragrances Inc. (NYSE:IFF) is an American perfume company that is one of the largest of its kind and with a global operations base. The firm's shares tanked by 22% in early August as it missed analyst EPS estimates by a wide margin and undershot the revenue estimates as well.
As of June 2023, 46 out of the 910 hedge funds surveyed by Insider Monkey had held a stake in International Flavors & Fragrances Inc. (NYSE:IFF). Scott Ferguson's Sachem Head Capital is the company's biggest stakeholder since it owns $530 million worth of shares.
Pfizer Inc. (NYSE:PFE) is a global pharmaceutical giant. Its shares gave up most of their gains in August after hype surrounding a new coronavirus variant died down as concerns still remain about the demand for coronavirus vaccines.
After digging through 910 hedge funds for their second quarter of 2023 shareholdings, Insider Monkey discovered 73 investors in the firm. Pfizer Inc. (NYSE:PFE)'s largest hedge fund shareholder is Jim Simons' Renaissance Technologies due to its $308 million stake.
Wells Fargo & Company (NYSE:WFC) is one of the largest banks in the U.S. It is also one of the most controversial American banks, and is back in the spotlight these days after the Securities and Exchange Commission (SEC) slapped it with a $35 million fine for overcharging thousands of investment accounts.
By the end of this year's June quarter, 75 out of the 910 hedge funds polled by Insider Monkey had bought Wells Fargo & Company (NYSE:WFC)'s shares. Natixis Global Asset Management's Harris Associates is the company's biggest investor since it owns 24 million shares that are worth $1 billion.
U.S. Bancorp (NYSE:USB) is another large American bank. The firm is headquartered in Minneapolis, Minnesota. After its shares tanked during the regional banking crisis earlier this year, the firm won some respite in August after a Japanese bank agreed to invest $936 million in the bank.
Insider Monkey scoured through 910 hedge fund portfolios for their second quarter of 2023 investments to discover that 42 had held a stake in the bank. U.S. Bancorp (NYSE:USB)'s largest hedge fund shareholder is Jean-Marie Eveillard's First Eagle Investment Management due to its $300 million stake.
Biogen Inc. (NASDAQ:BIIB) is an American firm that makes and sells treatments for nervous system disorders. Its shares are rated Buy on average and the firm has beaten analyst EPS estimates in all four of its latest quarters.
As of Q2 2023 end, 64 out of the 910 hedge funds part of Insider Monkey's database had bought Biogen Inc. (NASDAQ:BIIB)'s shares. Jim Simons' Renaissance Technologies is the biggest investor out of these since it owns $316 million worth of shares.
The Walt Disney Company (NYSE:DIS), Biogen Inc. (NASDAQ:BIIB), Etsy, Inc. (NASDAQ:ETSY), and Zimmer Biomet Holdings, Inc. (NYSE:ZBH) are some undervalued wide moat stocks seeing high analyst price targets.
