We Just Downgraded These 2 Companies. Here’s Why You Should Buy Their Stocks Anyway.

Susan Dziubinski: I’m Susan Dziubinski with Morningstar. At Morningstar, we think the best stocks to buy are undervalued shares of companies with competitive advantages. Morningstar encapsulates a company’s competitive advantages in our Economic Moat Ratings. Companies that earn wide economic moat ratings should be able to fight off competitors for 20 years or more. And those with narrow economic moat ratings should remain competitive for at least a decade.

Moat ratings aren’t set in stone: Economic moats can strengthen or weaken over time as individual companies and sometimes entire industries evolve. And as a result, Morningstar can change a company’s moat rating.

But the stocks of companies that have undergone moat rating changes can still be overvalued or undervalued. So, a moat rating change isn’t a buy or a sell signal. In fact, Morningstar recently downgraded the economic moat ratings on two companies whose stocks look undervalued. These stocks look like buys today even after their downgrades.

We Just Downgraded These 2 Companies. Here’s Why You Should Buy Their Stocks Anyway.

1. Comcast CMCSA
2. VF VFC

Morningstar cut the economic moat rating on Comcast to narrow from wide for two reasons. First, returns on capital in the company’s core US cable broadband business have deteriorated. We expect that trend to persist, as rivals continue to invest more in their networks and wireless offerings cut into the market. Second, profitability at NBC Universal has worsened and Peacock continues to experience significant losses. But despite the moat downgrade, we still expect Comcast to remain a dominant broadband provider that’ll produce consistent cash flow for the foreseeable future. We think Comcast stock is worth $54, and it looks undervalued today.

Morningstar also downgraded the economic moat rating on VF to no moat from narrow moat. The company’s three largest brands—Vans, The North Face, and Timberland—still operate in attractive categories and are well-known. But each has struggled since the pandemic. We think VF has fallen behind on some consumer trends, and its product innovation has been inadequate. We therefore no longer believe that the firm will remain competitive for a decade or more. That being said, we think management is taking the right steps to stabilize the business with its new “Reinvent” strategy. We think VF stock is attractively priced, and shares are worth $39 apiece.

For more stock ideas, be sure to visit Morningstar.com and subscribe to Morningstar’s channel. Morningstar director Mike Hodel and senior analyst David Swartz provided the research behind this segment.

Watch Warren Buffett Bought These 2 Stocks. Should You? for more from Susan Dziubinski.