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<p>Preface ix</p> <p>Acknowledgments xi</p> <p><b>Chapter 1 Guiding Principles of Morningstar’s Equity Research 1</b></p> <p>Question 1: How Can We Identify Which Businesses Are Great? 2</p> <p>Question 2: When Is the Best Time to Invest in Great Businesses? 6</p> <p><b>Chapter 2 What Makes a Moat? 11</b></p> <p>Moat Sources 13</p> <p>Notes 33</p> <p><b>Chapter 3 Why Moat Trends Matter 35<br /></b><i>Contributed by Stephen Ellis, a member of Morningstar’s Economic Moat Committee and head of Financial Services equity research at Morningstar</i></p> <p>Moat Trends and Fundamental Performance 37</p> <p>Five Key Considerations for Moat Trends 38</p> <p>Intangibles 41</p> <p>Cost Advantage 44</p> <p>Switching Costs 47</p> <p>Network Effect 51</p> <p>Efficient Scale 54</p> <p>Best Practices for Moat Trend Analysis 57</p> <p><b>Chapter 4 How Stewardship Affects Economic Moats 61<br /></b><i>Contributed by Todd Wenning, who oversees Morningstar’s equity stewardship methodology</i></p> <p>Meet Our Stewardship Methodology 62</p> <p>Drilling Down 63</p> <p><b>Chapter 5 Applying Moats to Dividend Investing 81<br /></b><i>Contributed by Josh Peters, director of equity-income strategy for Morningstar and editor of the Morningstar</i>® <i>DividendInvestor</i>SM <i>newsletter</i></p> <p>Why Dividends Matter 83</p> <p>Which Dividends? 87</p> <p><b>Chapter 6 The Importance of Valuation 93<br /></b><i>Contributed by Joel Bloomer, Matt Coffina, and Gareth James, members of Morningstar’s Moat Committee and contributors to Morningstar’s valuation methodology</i></p> <p>Valuation Concepts 95</p> <p>Cost of Capital and Returns on Capital 96</p> <p>Morningstar’s Valuation Approach 97</p> <p>Example: Calculating ROIC 99</p> <p>Forecasting Future Free Cash Flows 102</p> <p>The Morningstar RatingTM for Stocks 106</p> <p>Fair Value Uncertainty and Cost of Equity 107</p> <p>Notes 111</p> <p><b>Chapter 7 Do Moat Ratings Predict Stock Returns? 113<br /></b><i>Contributed by Warren Miller, head of quantitative research at Morningstar</i></p> <p><b>Chapter 8 Putting Moat and Valuation to Work: Portfolio Strategies 121</b></p> <p>Wide Moat Focus Index 121</p> <p>The Tortoise and Hare Portfolios 124</p> <p><b>Chapter 9 Basic Materials 129</b></p> <p>Commodity Manufacturers 130</p> <p>Commodity Processors 133</p> <p>Metals and Mining 135</p> <p><b>Chapter 10 Consumer 139</b></p> <p>Beverages 140</p> <p>Consumer Products 141</p> <p>Tobacco 143</p> <p>Restaurants 144</p> <p>Retail Defensive 146</p> <p>Specialty Retail 148</p> <p>Lodging 149</p> <p>Notes 151</p> <p><b>Chapter 11 Energy 153</b></p> <p>Oil and Gas Drilling 154</p> <p>Oil and Gas Exploration and Production 156</p> <p>Oil and Gas Midstream 158</p> <p>Refining 159</p> <p>Oil and Gas Integrateds 161</p> <p>Engineering Services 163</p> <p><b>Chapter 12 Financial Services 167</b></p> <p>Banks 168</p> <p>Capital Markets 170</p> <p>Credit Services 172</p> <p>Financial Exchanges 173</p> <p>Insurance 174</p> <p><b>Chapter 13 Healthcare 177</b></p> <p>Pharmaceuticals 178</p> <p>Biotechnology 180</p> <p>Medical Devices 182</p> <p>Medical Instruments and Supplies 184</p> <p>Diagnostics and Research 185</p> <p><b>Chapter 14 Industrials 187</b></p> <p>Railroads 188</p> <p>Airport Operators 190</p> <p>Aerospace and Defense 191</p> <p>Trucking and Marine Shipping 192</p> <p>Waste Management 193</p> <p>Heavy Equipment 195</p> <p>Diversified Industrials 197</p> <p><b>Chapter 15 Technology 199</b></p> <p>Consumer Technology 200</p> <p>Enterprise Hardware Systems 202</p> <p>IT Services 203</p> <p>Semiconductors 205</p> <p>Software 207</p> <p>Telecom Services 209</p> <p><b>Chapter 16 Utilities 211</b></p> <p>Regulated and Diversified Utilities 212</p> <p>Independent Power Producers 214</p> <p>About the Authors 217</p> <p>Index 221</p>

<p>Heather E. Brilliant, CFA <p>Co-Chief Executive Officer <p>Morningstar Australasia <p>Prior to assuming her current role, Brilliant led Morningstar’s global equity and corporate credit research teams, consisting of more than 120 analysts, strategists, and directors. Brilliant is a member of the CFA Institute Board of Governors and is a past chair of the CFA Society of Chicago. <p>Elizabeth Collins, CFA <p>Director of Equity Research, North America <p>Morningstar <p>Collins is responsible for leading Morningstar’s team of North American-based equity research analysts. She has served as chair of Morningstar’s Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar. <p>Morningstar is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. <p>To find out more about Morningstar’s approach to stock investing and receive a free trial of our research, visit: www.global.morningstar.com/whymoatsmatter

<p>Just as physical moats protect castles from enemies, economic moats—or sustainable competitive advantages—protect companies from competitors. Legendary investor Warren Buffett devised the economic moat concept. Morningstar has made it the foundation of a successful stock-investing philosophy. <p>At Morningstar, we’ve always viewed investing in the most fundamental sense: We want to hold shares in great businesses for long periods of time. How can you tell a great business from a poor one? A great business can fend off competition and earn high returns on capital for many years to come. The key to finding these great companies is ­identifying economic moats that stem from at least one of five sources of competitive advantage—intangible assets, cost advantage, switching costs, network effect, and efficient scale—each of which we explore in great depth. <p>Even better than finding a great business is finding one at a great price. The stock market affords virtually unlimited opportunities to track prices and buy or sell securities at any hour of the day or night. But looking past that noise and understanding the value of a business’ underlying cash flows is the key to successful long-term investing. When you focus on a company’s fundamental value relative to its stock price, and not where the stock price sits today versus a month ago, a day ago, or five minutes ago, you start to think like an owner, not a trader. And thinking like an owner will make you a better investor. <p>As you’ve probably guessed, this book won’t tell you how to get rich quick by juggling stocks. What it will give you is a fundamental framework for successful long-term investing. The book will help you answer two key questions: How can I identify a great business, and when should I buy that business to maximize my return? If you get these two things right more often than not, you’re well on your way to investing success. <p>Ours is not the only valid method for investing in stocks, but it’s one that has worked well over the years. Using fundamental moat and valuation analysis has led to superior risk-adjusted returns and made Morningstar analysts some of the industry’s top stock-pickers. In this book, we share all the ins and outs of our moat-driven investment philosophy, which you can use to identify great stock picks for your own portfolio.

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