Marketing Communication

Biogen’s FDA Approval Takes Center Stage

13 July 2021

The Morningstar Wide Moat Focus Index (the “Moat Index” or “Index”) underperformed the S&P 500^® Index in June (1.15% vs. 2.33%, respectively). Despite the modest underperformance, the Index remains ahead of the S&P 500 Index by over 4.5% through this year’s halfway point (19.77% vs. 15.25%, respectively).

Biotech News Dominates Among June’s Leaders

We learned in early June that Biogen (BIIB) received FDA approval for their Alzheimer’s disease treatment, aducanumab. The news sent shares higher and Morningstar quickly raised its fair value estimate for BIIB shares from $350 to $401. This reflected an increased probability of FDA approval (from 40% to 100%) and an expected drug launch of 2024 to 2021, which in turn increased forecasted future cash flows for the biotech firm. It was not all sunshine and rainbows for Biogen in June as Morningstar subsequently lowered its fair value estimate from $401 to $391 per share following disappointing data in ophthalmology gene therapy and depression treatments. Nonetheless, the FDA approval further cemented Morningstar’s conviction around BIIB’s wide moat rating, owing in large part to Biogen’s leading position in Neurology. BIIB lead all Index components in June by a wide margin.

Several tech firms also posted strong returns in June. ServcieNow (NOW), Adobe (ADBE), Guidewire Software (GWRE), and Blackbaud (BLKB) were among the leaders from the sector.

Cyclicals Reset

Following a strong start to 2021, cyclical stocks generally pulled back in June. Financials were broadly represented in the list of companies posting negative returns within the Index in June. More on that in the Index review discussion below.

Beyond financials, two underperforming companies stood out in June: Compass Minerals (CMP) and John Wiley & Sons (JW/A).

Compass Minerals had enjoyed a slow but steady recovery from COVID-19 pandemic lows in early April 2020 to reach stock price levels in May 2021 not seen since late 2018. However, through June, CMP saw its share price sell off to a greater degree than other materials companies did. Despite this price action, Morningstar sees Compass’ wide moat rating as stable and has not adjusted its fair value estimate since a two dollar decrease from $80 to $78 per share in March of 2021. CMP’s cost-advantaged assets related to rock salt and sulfite of potash fertilizer continue to drive its advantage over competition, though Morningstar acknowledges the commodity-sensitive risks associated with investment in the company. At present, CMP trades at nearly a 25% discount to Morningstar’s fair value estimate.

John Wiley & Sons features an impressive portfolio of research and education assets and it has been a member of the Moat Index for the better part of the last three years. Following a stretch of impressive stock price performance, the company was scaled out of the Moat Index in March and June 2021. Despite its stock price pull back in June, which made it the second worst performing company in the Index, Wiley left at a notable premium to Morningstar’s fair value estimate.

June 2021 Morningstar^® Wide Moat Focus Index^SM Review

In a reversal of the value rotation of 2020, the Moat Index saw its exposure to financials decrease and tech stocks increase as valuation opportunities began presenting themselves in some areas of the market where there hasn’t been much value to be had in recent years. Growth exposure increased and value decreased leaving growth, value and core style exposure nearly evenly distributed within the Index.

All told, outside of the decrease in financials exposure and increase in technology exposure there were no other dramatic shifts in the Index.

Index Additions & Increased Allocations
Company	Ticker	Price/Fair Value
Polaris Inc.	PII	0.73
ServiceNow Inc.	NOW	0.78
Facebook Inc.	FB	0.86
Tyler Technologies Inc.	TYL	0.87
Microsoft Corp	MSFT	0.91
Guidewire Software	GWRE	0.91
Intercontinental Exchange	ICE	0.93
Thermo Fisher Scientific	TMO	0.94
Masco Corp	MAS	0.95

Index Deletions & Decreased Allocations
		Failed Screen
Company	Ticker	Moat Rating	Price/Fair Value	Other
Bank of America Corp	BAC		x
Charles Schwab Corp	SCHW		x
John Wiley & Sons Inc.	JW/A		x
Northrop Grumman Corp	NOC		x
Raytheon Technologies	RTX		x
The Bank of New York	BK		x
US Bancorp	USB		x
Yum! Brands Inc.	YUM		x

Source: Morningstar. Price/fair value data as of 8 June 2021. Past performance is no guarantee of future results. For illustrative purposes only.

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