|source : dailyfx
The stock market is changing a lot and can be uncertain. Many big companies in the S&P 500 index are not doing well and have difficult prospects for 2023. Because of this, investors are being careful when investing in these large companies.
But there are other options for investing. Sometimes, companies that are not as well-known can do better during these uncertain times. Small-cap stocks, which are stocks of smaller companies, often focus more on the local market. This can protect them from problems caused by global events or changes in currency values, which have affected many big multinational companies recently. Also, historically, small-cap stocks in the United States have performed better than larger companies over a long time.
For a company to do well, it needs to have an advantage over its competitors. Morningstar, a company that analyzes stocks, calls this advantage a “moat.” A wide moat means the company has strong advantages that make it hard for others to compete with them.
Here are five companies that Morningstar thinks have wide moats and could be good small-cap stocks to buy for 2023 and the future.
John Wiley & Sons Inc. Class A (WLY)
John Wiley & Sons, Inc. is a company that publishes educational materials like textbooks and journals. It has been around for more than 200 years and is well-known in the education industry.
According to Morningstar analyst Zain Akbari, Wiley has a strong competitive advantage that will continue even though there may be some ups and downs in student enrollment. This advantage comes from their collection of important journals and their relationships with academic institutions, researchers, and corporations. It would be expensive for these customers to switch to other products.
However, Akbari also mentions that this advantage could weaken because there is a shift away from traditional textbooks in education. So, if you plan to invest in this company for the long term, it’s important to keep an eye on this trend.
Morningstar gives WLY a five-star rating, and on May 30, its stock closed at $36.17, which is 32% lower than Morningstar’s estimate of its fair market value of $53.
The Western Union Co. (WU)
The Western Union Co. is a company that helps people send money to others around the world. They provide money transfer services, making it easier to move money from one place to another. Morningstar analyst Brett Horn believes that Western Union’s digital channel, which allows people to transfer money online, is a crucial part of its competitive advantage.
Although the company’s earnings for the first quarter of 2023 were not very impressive, there are indications that Western Union is working on resolving its recent issues and moving towards overall stability. Because of this, Horn still considers the company to have a wide moat based on its significant advantage in size.
According to Horn, Western Union is the leading company in an industry where being big gives significant benefits. The money transfer business can grow without increasing costs by much, so Western Union has an advantage in terms of cost. Its operating margins, which measure how much profit it makes from its operations, are about twice as high as its competitors. However, Horn also points out that if the company’s revenue doesn’t grow much in the future, the value of its competitive advantage may come into question.
Morningstar gives Western Union five stars as a rating, and on May 30, the stock closed at $11.56. This is 36% lower than Morningstar’s estimate of its fair market value, which is the price the stock should ideally have.
Compass Minerals International Inc. (CMP)
Compass Minerals is a company that produces salt, plant nutrients, and magnesium chloride. According to Morningstar strategist Seth Goldstein, Compass Minerals has valuable assets that give it an advantage in terms of cost. Their Goderich rock salt mine in Ontario has unique geological advantages, and they can deliver salt to customers at a lower cost compared to their competitors because of their access to a deep-water port.
However, there is a challenge for Compass Minerals. Their sales of salt depend on the number of snowy days in a season, so their revenue is affected by the weather. This means that they are also exposed to the risks of climate change, which can cause variations in snowfall from year to year. However, Goldstein notes that over longer periods of time, winter weather tends to even out.
Even in a scenario where salt volumes and profits are lower and there is little recovery in plant nutrition volumes and profits, Goldstein still gives Compass Minerals a fair market value of $30. The stock is currently trading slightly above $33, which means there is a good opportunity for long-term investors to buy Compass Minerals shares at a price that offers a reasonable level of safety.
Morningstar gives Compass Minerals five stars as a rating, and on May 30, the stock closed at $32.50. This is a 50% discount compared to Morningstar’s estimate of its fair value, which is the ideal price for the stock.
Core Laboratories Inc. (CLB)
Core Laboratories (CLB) is a company that provides services related to reservoir characterization, which helps in developing and managing reservoirs. According to Morningstar analyst Katherine Olexa, things are looking positive for Core Laboratories in 2023. Their core analysis business, which is a crucial part of their services, has been consistently successful for many years. The company has also been able to expand its offerings without moving away from its niche.
Although the COVID-19 pandemic affected their return on invested capital (ROIC), Olexa is confident that Core Laboratories will recover. She predicts that their ROIC will average 27% over the next decade and reach 33% by 2032.
Morningstar gives Core Laboratories four stars as a rating, and on May 30, the stock closed at $22.12. This is a 24% discount compared to Morningstar’s estimate of its fair value, which is the ideal price for the stock.
Guidewire Software Inc. (GWRE)
According to Morningstar analyst Dan Romanoff, Guidewire is becoming a dominant player in a niche industry. They provide software for property and casualty (P&C) insurers. Romanoff believes that Guidewire has been successful because they convinced P&C insurers to upgrade their old systems to Guidewire’s solutions.
The industry Guidewire operates in is considered “sleepy” because it has been traditionally dominated by older software vendors. However, Romanoff sees a lot of potential for Guidewire because they have already established a strong position and have higher switching costs for their software. This means that once insurers start using Guidewire, it’s unlikely they will switch back to their old systems.
Guidewire has a market capitalization (market cap) of around $6.5 billion. While this might not fit the strict definition of a small-cap company, Morningstar considers any company in the bottom 10% of U.S. equities’ capitalization to be small-cap. Therefore, Guidewire falls within this category.
Morningstar gives Guidewire four stars as a rating, and on May 30, the stock closed at $81.60. This is about a 14% discount compared to Morningstar’s estimate of its fair value, which is the ideal price for the stock.