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Big Tech firms like Nvidia, Apple, and Microsoft lead in shareholder value creation.
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Stocks with a wide economic moat can be a good long-term investment.
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But only Microsoft, Alphabet, and UnitedHealth Group are rated undervalued by Morningstar.
Past performance does not guarantee future success; it’s a line frequently used for investing advice. That’s because stocks are a moving target amid shifting fundamentals, business cycles, interest rates, and inflation.
But that doesn’t mean their historical strength can’t be considered. If a company’s stock has continued to rise, especially for over a decade, that sustained performance suggests it’s doing something right. And it could be a good starting point to filter for good long-term investments or see if any common characteristics helped them succeed.
Amy Arnott, a portfolio strategist at Morningstar, recently did just that by pulling a list of the top stocks that have created the most value for investors over the past decade. One common denominator among the vast majority of them is that they have wide economic moats, which means they are less likely to face competition in the next 20 years. This is especially important for companies spending mega dollars — like AI players — in hopes of reaping long-term benefits and wider market share. And to do that, they need a long runway with little competion to reap the returns of their capital expenditure for many years.
She also found that stocks able to create a lot of value over long periods of time tend to continue performing well for many years, which reinforces the approach of Warren Buffett, who once quipped that the ideal holding period is forever.
In this instance, Arnott measured value creation by looking at the biggest increases in market cap from 2015 through 2024, plus the value of dividends each company paid.
The list she pulled includes 15 sector-neutral names. Unsurprisingly, Big Tech, and more specifically Nvidia, tops the list as the stock that has returned the most value to shareholders, with more than $3 trillion in value created. It is followed by Apple, Microsoft, Amazon, Alphabet, Meta, Tesla, and Broadcom, all of which created more than $1 trillion in shareholder value.
However, even if these names are well recognized, it doesn’t mean it’s a good time to buy shares. While there’s a mixed bag of reasons a stock can fall out of favor, one of the central ones is simply that the share price already reflects the strength of the company.
Nonetheless, three names stand out for being rated four stars out of five, which means Morningstar considers them moderately undervalued or trading at slight discounts to their analysts’ fair-value estimates.
3 stocks that are still discounted
Microsoft is one of the Big Tech players being pulled forward by its AI innovation, particularly its cloud computing platform Azure. While revenue growth is expected to slow for the giant, going from 15.7% in 2024 to 13.2% by 2026, the company’s operating margin is expanding, from 44.6% in 2024 to 45.1% by 2026; it’s a sign of continued profitability and efficient capital expenditure, a key gauge of successful expansion amid steep AI spending.
Its fair value estimate, according to Morningstar, is $490 a share. As of Friday, it was trading near $391 a share, meaning it’s still at a discount. Morningstar’s senior analyst Dan Romanoff’s conviction on the price target rides on expectations of growing profitability from its cloud computing platform Azure, its next-level offerings in Office 365 E5, and its Power Platform, which allows companies to develop websites and apps simply.
Alphabet is another major player in the cloud computing space that’s also spending big bucks on AI development. One hiccup the giant tech firm faces is capacity limits on its cloud platform, which has slowed revenue growth. However, Malik Ahmed Khan, an equity analyst at Morningstar, expects capacity to widen which will pick growth back up. Meanwhile, he points to other areas of Google’s strength, including revenue growth from its AI-driven search engine and its YouTube business.
Even as the search engine giant’s revenue is expected to slow, its operating margin is expected to expand slightly from 32.1% in 2024 to 32.3% by 2025. The analyst increased the stock’s fair value estimate from $220 to $237 after it beat fourth-quarter earnings expectations.
UnitedHealth Group has had a bad few months. First, the shooting of its former CEO, Brian Thompson, in Midtown Manhattan sparked widespread backlash over the company’s approach to insurance coverage. Last week, The Wall Street Journal reported the company was under investigation for potential Medicare billing fraud.
Its stock price has been volatile as investors try to gauge what to make of all the news. Still, Morningstar’s senior analyst Julie Utterback believes the stock is undervalued at a fair value of $590 a share. On Friday, it was trading near $467. Utterback’s note highlights that in 2024, the firm made 47% of its operating profits from medical insurance, but only 15% came from Medicare. Therefore, the probe over Medicare shouldn’t be cause for a steep sell off, suggesting investors are overreacting. Additionally, the investigation could have a wide range of outcomes.
However, investors who decide to take on exposure in healthcare stocks should be prepared for volatility and keep their ears at the door as Republicans release changes to healthcare coverage. Still, Utterback writes that the stock’s price is discounted enough to buffer policy uncertainty.
Read the original article on Business Insider