Trends with Benefits #48: Stock Selection and Valuation with Andrew Lane

In this episode I visit with Andrew Lane, Director of Equity Research, Index Strategies with Morningstar to discuss his experience as an equity research analyst with Morningstar, Morningstar’s Wide Moat approach to stock selection and valuation and whether valuation even matters in today’s markets.

Moat Investing

Andrew recently published a new white paper that dissects Morningstar’s flagship Wide Moat Focus Index’s 2020 performance. The paper contextualizes the 2020 results as the strategy approaches a 14-year live track record. Despite headwinds in 2020 from Morningstar’s approach to FANMAG (Facebook, Amazon, Netflix, Microsoft, Apple, and Google/Alphabet), its had a pretty compelling long-term track record.

This was a good opportunity to explore the moat investing philosophy with someone who’s not only been an equity research analyst at Morningstar, but who also led their Economic Moat Committee for a time. We discuss his background and becoming an equity research analyst, the tenets of the moat philosophy and process.

One key attribute of the moat methodology is Morningstar’s assessment of a stock’s fair value. It incorporates forward-looking estimates of a company’s worth to help judge whether or not now is the right time to allocate to it. So much of financial media is busy discussing the dynamic of growth versus value like looking in a rear-view mirror. By defining growth and value with backward looking metrics such as price-to-earnings or price-to-book, investors may be boxing themselves into a corner by having to make decisions between the two when perhaps what’s more important is simply valuation. In today’s market, does valuation even matter anymore? We chat about that too.