Meta Platforms Takes Center Stage Among Moat Stocks

A punishing 2022 for Meta Platforms (META) created a valuation opportunity – one that has paid off as it becomes the top contributor year-to-date for the Morningstar Wide Moat Focus Index.

April was a subdued month – at least relative to the volatility seen in March given the banking crisis – with U.S. equities as a whole moving mostly sideways.

Investors appeared to be awaiting the kick-off to an important earnings season and the latest guidance from the Federal Reserve’s early May policy meeting. The benchmark S&P 500 Index was up slightly with a 1.56% return during the month.

However, small- and mid-cap companies fared worse as the potential for a recession continued to weigh on the segment. The S&P SmallCap 600 Index and the S&P MidCap 400 Index returned -2.78% and -0.78 in April, respectively.

The Morningstar Wide Moat Focus Index (the “Moat Index”) and the Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) both performed in line with their respective areas of the market this month.

The Moat Index was up 1.01% while the SMID Moat Index was down 1.39%. Year-to-date, however, both Moat Indexes remain ahead of their benchmarks through the end of April.

Moat Stocks Outperform in 2023

Year-to-Date Total Return as of 4/30/2023

Source: Morningstar. As of 4/30/2023. Past performance is no guarantee of future results. Index performance is not illustrative of Fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333. Indexes are unmanaged and are not securities in which an investment can be made.

From Punished to Prosperous: Meta Platforms

The wide moat rated Meta Platforms Inc. was severely punished in 2022, as CEO Mark Zuckerberg’s moonshot metaverse plan was not panning out and the Federal Reserve was just beginning its historically steep rate hike cycle.

Many investors lost faith in the company, and the stock tumbled over 60% that year. However, the long-term view and conviction of Morningstar senior equity analyst Ali Mogharabi led to a perceived valuation opportunity that the Moat Index has been able to capture.

With its first quarter earnings beat and optimistic guidance, META was up over 13% in April and was the top contributor to performance in the Moat Index during the month as well as year-to-date.

Even after its impressive performance so far this year, Morningstar believes that there could still be some room for the stock to run. Below are Ali’s comments on META following the earnings release.

Morningstar Analyst Comments | by Ali Mogharabi April 27, 2023

Meta’s first-quarter results confirmed our views on Reels monetization, ad conversion improvement, margin potential, and an unharmed network effect moat source. We have increased our revenue projections and continue to expect margin expansion beginning in 2024, pushing our fair value estimate up to $278 per share from $260. While the share price of this wide-moat firm has increased more than 135% from its lows in November 2022, we believe it remains undervalued.

Other top contributors in April include medical-device company Medtronic (MDT) and leading U.S. credit bureau TransUnion (TRU). On the reverse side, detractors to Moat Index April performance landed primarily within the Technology and Consumer Cyclical sectors.

Top Contributors and Detractors from Moat Index – April 2023

Click to enlarge

Click to enlarge

Source: Morningstar, April 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.

Recession Fears Weighed on Small- and Mid-Caps

Small and mid-cap companies kicked off 2023 with impressive performance, benefiting from optimism around the potential for a pause in rate hikes and the possibility of a soft economic landing.

However, the U.S. Fed has since continued their hawkish tone, and market views around economic growth have shifted, leading to underperformance as fears of a potential recession grow.

Historically, smaller cap companies tend to lag the broader market in performance ahead of a recession, but they often outperform during the recovery phase.

This dynamic can be painful for investors in the near term, but it may also set up an attractive entry opportunity for those looking to position for eventual brighter days.

Within the SMID Moat Index, top contributors for April were primarily within the Healthcare sector, including the medical instruments and supplies company ResMed (RMD), the pure-play infusion therapy company ICU Medical Inc. (ICUI) and Zimmer Biomet (ZBH), an orthopedic reconstructive implants company. Sectors that detracted the most from SMID Moat Index performance during the month were the Technology and Consumer Cyclical sectors.

Top Contributors and Detractors from SMID Moat Index – April 2023

Click to enlarge

Click to enlarge

Source: Morningstar, April 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.

Important Disclosures

Source for all data unless otherwise noted: Morningstar.

Fair value estimate: the Morningstar analyst’s estimate of what a stock is worth. Price/Fair Value: ratio of a stock’s trading price to its fair value estimate.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.

Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/etf/equity/moat/holdings/.

Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/etf/equity/smot/holdings/.

An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.

The Morningstar^® Wide Moat Focus Index^SM and Morningstar^® US Small-Mid Cap Moat Focus Index^SM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or the VanEck Morningstar SMID Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar^® is a registered trademark of Morningstar, Inc. Morningstar^® Wide Moat Focus Index^SM and Morningstar^® US Small-Mid Cap Moat Focus Index^SM are service marks of Morningstar, Inc.

Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.

The Morningstar moat-driven indexes represent various regional exposures and consist of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.

The Morningstar^® Wide Moat Focus Index^SM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar’s equity research team.

The Morningstar^® US Small-Mid Cap Moat Focus Index^SM is intended to track the overall performance of small- and mid-cap companies with sustainable competitive advantages and attractive valuations according to Morningstar’s equity research team.

The Morningstar^® US Small-Mid Cap Index^SM is a broad based index intended to track the overall performance of U.S. small- and mid-cap companies according to Morningstar.

The S&P SmallCap 600 Index represents small-cap US companies. The S&P Midcap 400 Index provides investors with a benchmark for mid-sized US companies. The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.

The S&P 500^® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2023 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit S&P Dow Jones Indices S&P^® is a registered trademark of S&P Global and Dow Jones^® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

An investment in the VanEck Morningstar Wide Moat ETF (MOAT^®) may be subject to risks which include, among others, risks related to investing in equity securities, consumer discretionary sector, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.

An investment in the VanEck Morningstar SMID Moat ETF (SMOT^®) may be subject to risks which include, among others, risks related to investing in equity securities, small- and medium-capitalization companies, consumer discretionary sector, financials sector, health care sector, industrials sector, information technology sector, market, operational, high portfolio turnover, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and medium-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

Original Post

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.