Moat Stocks Show Grit in November Rally

After three straight negative months, U.S. equity markets snapped back in November with blockbuster gains that offset the overall declines from August through October. The S&P 500 gained 9% in November, which marks its best month in nearly a year and a half, and its sixth-best monthly return in the last 20 years. Positive remarks by Federal Reserve members, inflation that continues to cool, and an economy that remains stronger than expected all supported the rally which moved the S&P 500 within about 5% of its January 2022 all-time high.

The Morningstar Wide Moat Focus Index (the “Moat Index”) gained 9.92% in November, outpacing the benchmark S&P 500 Index by about 80 basis points during the month. The outperformance was the result of strong stock selection with several previously beaten-down names from the industrial and financial sectors as leading contributors. More on these names later. Year to date, the Moat Index continues to lead the S&P 500 by nearly 200 basis points as of the end of the month.

Smaller-cap companies breathed signs of life this month after having underperformed relative to their large-cap peers for much of the year. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) returned 10.01% in November, outpacing both the broad small- and mid-cap benchmarks by about 150 basis points each. Notably, the SMID Moat Index also outperformed the S&P 500 as well as its larger-cap sister Moat Index during the month. However, year to date, small- and mid-caps still remain significant laggards versus large-caps which have been the dominate players in equity markets this year.

U.S. Equities Rebound in End of Year Rally

As of 11/30/2023

Source: Morningstar. As of 11/30/2023. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333.

Moat Investing: A Disciplined Long-Term Approach

November's banner rally, which offset losses from the previous three months and propelled equites back toward a 2023 high, underscores the importance of remaining disciplined as an investor. Maintaining commitment to a well-defined and proven strategy can help reduce temptation to react emotionally during short-term market fluctuations. Morningstar’s moat investing philosophy, centering on high-quality companies with attractive prices, has demonstrated its mettle across numerous market environments. The Moat Index, which has a more than 15-year track record, may not beat the market every month, but its history of outperformance over longer holding periods is clear.

One of the key ingredients to finding success as it relates to moat investing, is time. It's important to recognize that the moat philosophy is best viewed as a long-term approach. The full potential of the valuation opportunities identified by the strategy may not materialize in just one month. Patience is crucial for investors, as it allows time for the market to recognize the intrinsic value of these high-quality companies with fortified business models.

Percent of Time the Moat Index Outperforms the S&P 500 Index

March 2007 – November 2023

Source: Morningstar. As of 11/30/2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein. Batting Average is measured by dividing the number of periods a portfolio or investment strategy outperforms a benchmark by the total number of periods.

Moat Index Top Contributors and Detractors

The outperformance of the Moat Index was once again driven largely by stock selection as opposed to an overweight (or underweight) to any particular sector. Several previously beaten-down names, which were detractors to performance in preceding months, rebounded in November to lead as top contributors to performance for the month.

TransUnion (TRU)

TransUnion, highlighted in last month’s blog as the leading detractor, saw its share price punished in October following disappointing third-quarter earnings and outlook. At the time, Morningstar equity analyst Rajiv Bhatia believed the sharp decline was an overreaction by the market and viewed TRU an attractive valuation opportunity. That view quickly proved correct with shares of TRU rebounding 34% in November as market participants came to the same realization. Today shares of TRU are trading around $60, representing about a 30% discount to Morningstar’s current $91 fair value estimate.

U.S. Bancrop (USB)

U.S. Bancrop is another beaten-down name that finds itself as a top performer in November. Early in the year, the banking crisis that saw the collapse of Silicon Valley Bank, and others, led to indiscriminate selling pressure on share prices of all regional banks. Wide moat U.S. Bancorp did not escape the negative sentiment, seeing its share price decline over 20% in March of this year. USB saw its position in the Moat Index increase to a full weight that quarter due to attractive valuation. This month shares of the company rallied over 19% making it a top contributor to performance in November. USB shares are currently trading at about a 25% discount to Morningstar’s $52 fair value estimate.

Top Contributors and Detractors from Moat Index - November 2023

Source: Morningstar, November 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

SMID Moat Index Top Contributors and Detractors

The smaller-cap SMID Moat Index also saw much of its outperformance this month come from stock selection rather than sector allocation effect. Notably though, two sectors do stand out in terms of representation within top contributors for the month. From consumer discretionary, both Williams-Sonoma (WSM) and DoorDash (DASH) find themselves as top performers with shares of each company increasing roughly 25% in November. Healthcare was also well represented with DaVita (DVA) and Agilent Technologies (A) both posting impressive 20%+ returns during the month.

Names detracting from the SMID Moat Index performance during the month include payroll and human capital management software company Paycom Software (PAYC), life sciences cloud-based software solutions company Veeva Systems (VEEV), and auto-parts supplier BorgWarner (BWA).

Top Contributors and Detractors from SMID Moat Index - November 2023

Source: Morningstar, November 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

Accessing Moat Stocks

VanEck Morningstar Wide ETF (MOAT) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.

VanEck Morningstar SMID Moat ETF (SMOT) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Morningstar US Small-Mid Cap Moat Focus Index.