We Just Upgraded These 6 Companies. Is It Time to Buy the Stocks?

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. When investing, it’s important to understand a company’s competitive advantages. Morningstar encapsulates a company’s competitive advantages in our economic moat ratings. Companies that we expect to successfully compete for 20 years or more earn wide moat ratings.

A company’s moat rating isn’t carved in stone; economic moats can strengthen or erode over time as companies and industries change. But just because we’ve upgraded a company’s moat rating doesn’t mean investors should rush out and buy the company’s stock. The stocks of upgraded companies can still be overvalued.

Morningstar recently upgraded the economic moat ratings on a handful of companies to wide. Most of these companies look overvalued today according to Morningstar, but they’d make great additions to a watchlist of high-quality stocks.

We Just Upgraded These 6 Companies. Is It Time to Buy the Stocks?

1. Marriott MAR
2. Hilton HLT
3. InterContinental IHG
4. O’Reilly Automotive ORLY
5. Motorola Solutions MSI
6. AbbVie ABBV

We recently awarded wide moat ratings to three premier hotel operators: Marriott, Hilton, and InterContinental. Why the upgrades? For starters, all three have significant scale that provides owners with marketing, distribution, loyalty, and technology expenditures that far exceed those of other players in the industry. These three brands also resonate with travelers, which has boosted the number of members in their loyalty programs and the frequency of room nights per member. And lastly, Marriott, Hilton, and InterContinental have leading industry revenue shares that we expect them to maintain. The stocks of all three of these wide-moat companies look overvalued today.

O’Reilly Automotive also recently had its moat rating upgraded to wide. We think O’Reilly is in a unique position to serve both do-it-yourself and professional customers thanks to its supply chain model and supplier relationships. The company leverages its scale to negotiate favorable discounts with its suppliers, too. We think O’Reilly is well positioned to benefit from strong demand for aftermarket auto parts and will be able to take market share from its fragmented competitive set. We think O’Reilly stock is worth $780 per share, and the stock trades far above that.

Our last two moat rating upgrades to wide go to Motorola Solutions and AbbVie. Motorola provides mission-critical communications and technology solutions to public safety agencies and commercial enterprises worldwide, where switching costs are high, and its solid relationships with various government entities provide a competitive edge. Meanwhile, AbbVie earns a wide economic moat thanks to its now diversified portfolio that’s heavily protected with long-dated patents, including patents on popular immunology drugs Skyrizi and Rinvoq as well as growth in its aesthetics business, led by Botox. The stocks of both Motorola and AbbVie look about fairly valued.

For more stock ideas, be sure to subscribe to Morningstar’s channel and visit Morningstar.com.

Morningstar directors Damien Conover and Eric Compton, senior analyst Dan Wasiolek, and analyst Noah Rohr provided the research behind this segment.

Watch 3 Top Stocks to Watch From the Best International Money Managers for more from Susan Dziubinski.