In this article, we take a look at 11 undervalued wide moat stocks to invest in.
Wide moat stocks are stocks with substantial competitive advantages that keep competitors from affecting their business that much.
Examples of wide moat stocks would be a company with a monopoly that’s very difficult for any competitor to gain market share from.
Another example of a wide moat stock would be a company with substantial network effects and scale.
Given competitors have a difficult time gaining market share, wide moat stocks tend to be profitable. In terms of their industry, they tend to have higher margins than their competitors given their leading position.
With their earnings, wide moat companies use the profits generated to either pay dividends, buy back shares, or to invest the capital back into their existing businesses or new ventures.
As a result of their steady businesses, some of the leading wide moat businesses have increased their annual dividends for 25 years or more.
Undervalued Stocks
Undervalued stocks are stocks of companies that are trading below their intrinsic value.
A company’s intrinsic value is basically what the company is really worth and not the market capitation the market is currently assigning it.
In bull markets, quality undervalued companies can be rare because valuations are often fairly high through the market given market optimism.
In bear markets, however, quality undervalued companies can be more common than during bull markets because lower valuations are more common.
2022
The market has decreased given the Federal Reserve has raised interest rates seven times this year to fight inflation. Although October and November’s inflation results were better than expected, the U.S. central bank has signaled it will raise interest rates even further next year as well.
As of December 19, the S&P 500 is down 20.41% year to date, while the Dow Jones Industrial Average has retreated 10.46% year to date and the Nasdaq Composite has declined 33.39% year to date.
Given the substantial increase in interest rates, many economists think there will likely be a recession next year as a result. If the recession is moderate to severe, many companies might not meet earnings estimates and the broader market could decline further.
If the broader market declines, the leading undervalued wide moat stocks could retreat further in the near term. In the long term, however, the leading stocks could have considerable upside.
Given the uncertainty, it could be a good idea for long term investors to own a well diversified portfolio of stocks across many different sectors.
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Methodology
For our list of 11 Undervalued Wide Moat Stocks to Invest in, we selected 11 stocks with wide moats and substantial competitive advantages that arguably trade below their intrinsic value.
We then ranked the stocks based on the number of hedge funds in our database that owned shares of the same stock at the end of Q3.
For those of you interested, also check out 12 Best Undervalued Stocks To Buy Now.
11 Undervalued Wide Moat Stocks to Invest in
11. State Street Corporation (NYSE:STT)
Number of Hedge Fund Holders: 38
State Street Corporation (NYSE:STT) is a leading asset manager that is a pioneer in ETF and index investing whose shares current trade for a forward P/E ratio of 9.4. Given the company’s competitive advantages such as its strong brand and scale that give it a wide moat, State Street Corporation (NYSE:STT) is arguably undervalued. Analysts estimate the company will earn $7.19 per share in 2022, $8.16 per share in 2023, and $9.16 per share in 2024.
Alongside Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT), State Street Corporation (NYSE:STT) is an undervalued wide moat stock that many hedge funds in our database owned at the end of Q3.
10. BlackRock, Inc. (NYSE:BLK)
Number of Hedge Fund Holders: 46
BlackRock, Inc. (NYSE:BLK) is the largest asset manager in the world with assets under management of around $10 trillion. Given the company’s AUM, BlackRock, Inc. (NYSE:BLK) has a wide moat considering its scale that allows it to realize higher margins than many of its competitors.
Although the stock trades for a forward P/E ratio of 20.25, the leading asset manager has substantial AUM growth potential with the expected growth in ETFs in the future. If it maintains its market share in ETFs, the company’s earnings per share also has substantial growth potential.
Of the 920 hedge funds in our database, 46 owned shares of BlackRock, Inc. (NYSE:BLK) at the end of Q3, ranking the stock #10 on our list of 11 Undervalued Wide Moat Stocks to Invest in.
9. Goldman Sachs Group, Inc. (NYSE:GS)
Number of Hedge Fund Holders: 69
Goldman Sachs Group, Inc. (NYSE:GS) is Wall Street’s leading bank with the best brand name and many of the financial sector’s best employees. Given the intellectual capital and the bank’s already immense resources, Goldman Sachs Group, Inc. (NYSE:GS) is a leader in investment banking and trading that can generate substantial normalized profits in the long term.
Given that shares have declined 9.92% year to date, Goldman Sachs Group, Inc. (NYSE:GS) currently trades for a forward P/E ratio of 9.22 which is pretty attractive in the long term given the bank’s competitive advantages.
8. Wells Fargo & Company (NYSE:WFC)
Number of Hedge Fund Holders: 77
As one of the big four banks in the United States, Wells Fargo & Company (NYSE:WFC) has substantial scale that affords the company wider margins than many of its smaller competitors. Given the higher interest rates, the bank has an opportunity to earn more in terms of net interest margin. Wells Fargo & Company (NYSE:WFC) is also increasing its capital returns. In Q3, the bank increased its common stock dividend by 20%.
Oakmark Funds commented on Wells Fargo & Company (NYSE:WFC) in a Q3 2022 investor letter,
Wells Fargo & Company (NYSE:WFC) has been a long-time holding in the Oakmark Fund. Despite the positives of higher interest rates and the company making good progress on reducing expenses and regulatory consent orders, Wells Fargo shares have fallen one-third from their highs earlier this year to roughly 6.5x our estimate of normalized earnings power, and the stock ended the quarter at ~1x next year’s tangible book value. We find this is far too cheap for a strong banking franchise capable of tangible returns in the low-to-mid teens across business cycles.
7. Citigroup Inc. (NYSE:C)
Number of Hedge Fund Holders: 85
Citigroup Inc. (NYSE:C) is another of the big four banks with substantial scale that gives it a wide moat. For Q3, Citigroup Inc. (NYSE:C) earned $1.63 per share on revenue of $18.5 billion versus the consensus of $1.42 per share on the sales of $18.25 billion.
Tangible book value was $80.344 per share at the end of Q3 which could make the stock undervalued in the long term given its current stock price of $43.93. Although the bank faces near term headwinds, Citigroup Inc. (NYSE:C) could potentially increase its earnings in the long term and its stock might trade closer to its book value as a result.
Citigroup Inc. (NYSE:C) ranks #7 on our list of 11 Undervalued Wide Moat Stocks to Invest in given 85 hedge funds in our database owned shares of the bank at the end of September.
6. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 97
Bank of America Corporation (NYSE:BAC) is another of the big four banks in the United States. As one of the big four banks, the company has substantial more resources to spend on improving its technology than smaller banks do. As a result of having arguably better technology, Bank of America Corporation (NYSE:BAC) has higher margins than many smaller banks.
In the future, Bank of America Corporation (NYSE:BAC) could also gain more market share as a result of having better technology. Given its forward P/E of 8.74, the bank arguably trades below its intrinsic value in the long term.
Like Bank of America Corporation (NYSE:BAC), Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT) are undervalued wide moat stocks owned by many hedge funds at the end of Q3.
5. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 110
JPMorgan Chase & Co. (NYSE:JPM) is arguably the best bank among the big four banks in the United States considering the bank’s leadership and its earnings history. In addition to having arguably the best CEO in finance in Jamie Dimon, JPMorgan Chase & Co. (NYSE:JPM) spends around $12 billion in technology to make many of its best in class products even better.
Managing Director and Head of Global Tech Strategy, Innovation & Partnerships at JPMorgan Chase Larry Feinsmith said, “While other tech companies have a narrower scope of things they do very well, what differentiates JPMorgan Chase is our ability to invest $12 billion dollars in a broad number of technologies simultaneously. Our size and scale are simply unparalleled.” With great products, JPMorgan Chase & Co. (NYSE:JPM) has long term earnings growth potential.
4. The Walt Disney Company (NYSE:DIS)
Number of Hedge Fund Holders: 112
The Walt Disney Company (NYSE:DIS) shares have declined 44.6% year to date to trade for a forward P/E of 16.17 which could be attractive in the long term if the company maintains its market share in the entertainment business.
The Walt Disney Company (NYSE:DIS) certainly has many quality assets given its Marvel franchise and Disney World. Analysts have an average price target of $125.93 per share, which arguably makes the stock undervalued given The Walt Disney Company (NYSE:DIS)’s competitive advantages such as its brand and scale.
3. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders: 177
As the biggest social media company in the world, Meta Platforms, Inc. (NASDAQ:META) has substantial network effects that give it a wide moat. Given its shares trade for a forward P/E ratio of 14.44, Meta Platforms, Inc. (NASDAQ:META) also has long term upside if it can control costs and maintain its over 3 billion monthly active user base.
Furthermore, Meta Platforms, Inc. (NASDAQ:META) has considerable potential in AI which could help increase its earnings in the long term.
2. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 269
Amazon.com, Inc. (NASDAQ:AMZN) is an e-commerce and cloud computing leader with considerable scale that gives it substantial competitive advantages. While its shares trade for a forward P/E of 50.76, Amazon.com, Inc. (NASDAQ:AMZN) is nevertheless arguably cheap given its earnings growth potential in cloud computing.
Baron Funds commented on Amazon.com, Inc. (NASDAQ:AMZN) in a Q3 2022 investor letter,
Amazon.com, Inc. (NASDAQ:AMZN) is the world’s largest e-commerce retailer and cloud services provider. Shares of Amazon increased 6% in the quarter after the company reported strong results with 7% year-over-year revenue growth driven by 33% growth in Amazon Web Services (AWS), Amazon’s leading cloud computing service, while guiding for an acceleration in third quarter revenue growth, which is expected to be between 13% and 17% year-overyear. Amazon’s share of e-commerce is roughly 40%, far ahead of competition, yet domestic e-commerce accounted for only 14.5% of total retail sales (according to U.S. Census Bureau data for the second quarter of 2022), implying durable growth opportunities ahead. Internationally, the opportunity remains large as Amazon still has less than a 2% market share of international retail spending. Its advertising share is also only 3% and growing, underpinned by the structural closed-loop systems it enables (merchants know exactly whether their ad dollars resulted in a purchase since they are all done on the Amazon platform), which enables accurate targeting and measurement. Lastly, AWS has a good runway for growth as the industry still represents only 9.5% out of the $4.3 trillion of global IT spending according to Gartner. Areas such as logistics and health care present additional optionality.
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 269
Microsoft Corporation (NASDAQ:MSFT) ranks #1 on our list of 11 Undervalued Wide Moat Stocks to Invest in given 269 hedge funds in our database were long the stock at the end of the third quarter. Given its dominant position in desktop operating systems as well as its substantial market share in enterprise software, Microsoft Corporation (NASDAQ:MSFT) has a wide moat.
The stock also has considerable earnings growth potential in the future in AI which arguably makes shares undervalued. The company’s investment in OpenAI has been a pretty big success given the strong reception to OpenAI’s ChatGPT.
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Disclosure: None. 11 Undervalued Wide Moat Stocks to Invest in is originally published on Insider Monkey.
