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7 Stocks With Big Gains, Downside Protection

Wall Street sign
Wall Street sign

If you’re still in a defensive investing posture after last year’s stomach-churning market, it’s time to consider buying the stocks of companies with impregnable market-leading positions.

Ratings firm Morningstar refers to them as “wide moat” companies.

A “wide moat,” essentially, means a company has a distinct and sustainable competitive advantage over its peers that could protect its business in the event of a recession or a even a shift in the direction of its industry.

The width of a company’s moat is a result of a number of variables, including its size, brand-name strength, unique technologies, and the difficulty its customers may have in switching to a competitor’s products.

Those types of characteristics help keep a company and its cash flow stable in a difficult economy.

And Morningstar says that “companies that have generated returns on capital higher than their cost of capital for many years running usually have a moat, especially if their returns on capital have been rising or are fairly stable.”

Morningstar found seven wide-moat companies with share-price returns ranging from 10 percent to 36 percent this year, a period in which the S&P 500 index jumped 7 percent.

But indicative of how quickly things can change and the moat can start to evaporate, two big money managers that are on the list below, which was issued Feb. 6 by Morningstar, have seen their shares tumble within the last week on poor results from late 2011 because of investor withdrawals due to the markets' volatility as well as proposed regulatory changes.

Those firms, AllianceBernstein and Federated Investors, face a new threat to their money market fund businesses, in the form of new regulations now being discussed by the Securities and Exchange Commission.

If enacted, they could result in the fund firms having to raise capital to provide greater support to their funds in the event of a panic, or another that would allow the net asset value of money market fund shares to float, a decided departure from their now-fixed $1 a share benchmark, a change that would be sure to chase off investors seeking a safe, predictable return that these types of funds offer.

Here are Morningstar’s selection of seven stocks that have “wide moat” properties in inverse order of their share-price appreciation this year:

7.St. Jude Medical

St. Jude Medical makes cardiovascular medical devices, including the world’s most widely used mechanical heart valve. Its products include tissue heart valves, pacemakers, and implantable cardiovascular defibrillators.

Investor takeaway: Its shares are up 25 percent this year and have a three-year annualized return of almost 7 percent. Morningstar has a $49 price target on its shares, a 30-percent premium to the current price.

Morningstar says St. Jude Medical has “taken the lead in certain therapeutic areas,” underscoring its wide moat status, which it originally earned for its cardiac devices. Analysts give its shares four “buy” ratings, one “outperform,” and six “holds,” according to an analysts survey.

6. Autodesk

Autodesk is the leading vendor of computer-aided design software worldwide.

Investor takeaway: Its shares are up 24 percent this year and have a three-year annualized return of 30 percent. “Its strong competitive advantage, coupled with a sound business model, leaves the company well-positioned to benefit from a more stable economic environment,” says Morningstar. Analysts give its shares five “buy” ratings, one “outperform,” and two “holds.”

5. Federated Investors

Company profile:

Federated Investors provides asset management services for institutional and individual investors. Mutual funds represent around 85 percent of the firm’s assets under management. It’s a big player in the money market fund arena with $285 billion in such assets at the end of 2011.

Federated Investors has seen run-off in those assets due to low rate, and now it faces the challenge of new Securities and Exchange Commission regulations that is seen hurting money fund managers by costing them more to manage.

Investor takeaway: Its shares are up 19 percent this year (although they fell 5 percent last week), and have a three-year annualized return of 2.3 percent. The firm has been a big money market manager and so has been whipsawed by rate declines that have led to investor withdrawals, but Morningstar says “we think that the worst of the outflows are behind Federated and expect the firm to continue using its position as a top domestic manager of money market funds to expand both the depth and breadth of its operations.”

But Federated Investors may face new challenges as the SEC is proposing changes to money market funds regulations that call for more capital contributions on the part of fund managers. Its shares yield a hefty 5.41 percent. Analysts give its shares two “hold” ratings.

4. Capella Education

Company profile: Capella

is a regionally accredited, exclusively online post-secondary education company. It offers bachelor’s, master’s, and doctoral programs.

Investor takeaway: Its shares are up 23 percent this year, but have a three-year annualized loss of 8 percent. Morningstar says “With high demand for education, price-insensitive customers, minimal investment requirements, government-aided pricing, and a solid industry position, Capella possesses a wide economic moat, in our opinion.” Analysts give its shares three “buy” ratings, two “holds,” and one “underperform.”

3. Caterpillar

Company profile: Caterpillar

is the world’s largest maker of heavy construction equipment, including bulldozers, excavators, and loaders. It also produces engines for its own off-highway vehicles and others’ machines.

Investor takeaway: Its shares are up 24 percent this year and have a three-year annualized return of 56 percent. Its top markets, especially mining, are booming internationally, particularly in Asia, and its strong brand name usually makes it a top choice. When construction picks up domestically, it will do even better. Analysts give its shares one “buy” rating and four “holds.”

2. AllianceBernstein

Company profile:

AllianceBernstein

, with $406 billion in assets under management, offers investment management services to institutional, retail, and private clients. Its products include mutual funds,

hedge funds

, and separately managed accounts.

Morningstar said its wide moat characteristics include “a meaningful amount of assets under management, a diverse mix of assets, and broad distribution by channel and geography.”

Investor takeaway: AllianceBernstein’s shares are up 10 percent this year, even after losing 13 percent last Friday alone, after the company reported a nearly $200 million fourth-quarter loss and a steep drop in revenue. That’s because its clients continued to withdraw money from stocks as they turned risk-averse because of the market volatility throughout 2011, the company said.

Its shares have a three-year annualized return of 5.5 percent. They get two “hold” ratings from analysts.

1. Weight WatchersInternational

Company profile: Weight Watchers International

is a weight-management company with operations in more than 25 countries. Consumers buy more than $4 billion of Weight Watchers-branded products each year, and every week approximately 1.8 million people attend Weight Watchers meetings worldwide. The company encourages healthy weight loss through exercise, nutrition, and portion control.

Investor takeaway: Its shares are up 36 percent this year and have a three-year annualized return of 55 percent. Morningstar says “the company benefits from a wide economic moat because it would be extremely difficult for a competitor to replicate the company’s brand recognition and meeting infrastructure to compete against Weight Watchers in a significant way.”

Weight Watchers gets three “buy” ratings and two “holds” from analysts.

Additional News: Weight Watchers Is Shaking Off the Lean Times: CEO

Additional Views: Caterpillar Profit Could Rise $8 to $10 Per Share: Analyst

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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