10 Undervalued Wide Moat Stocks For 2025
As has been customary in recent years, Morningstar has released its list of 10 undervalued Wide-Moat Stocks. Before delving into this year's picks, let's first examine the performance of the 2024 list.
The table below summarizes the returns of the 10 stocks from 2024. The results are a mixed bag, with 4 out of 10 stocks recording losses. However, the winners far outpaced the losers in terms of percentage gains. For instance, RTX emerged as the top performer with a 41% return, while Estee Lauder was the largest detractor, suffering a 48% decline.
As many might have expected, this 10-stock, equally-weighted portfolio underperformed the S&P 500 in 2024. The portfolio incurred a slight loss of 0.42%, while the S&P 500 surged by an impressive 24.47%. This disparity would undoubtedly have been disappointing for investors.
So, why should we still consider wide-moat stocks for 2025? There are two reasons.
First, one year is not a sufficient timeframe to evaluate the success of an investment strategy. Looking back at 2023 and 2022, Morningstar’s picks outperformed the S&P 500, as I discussed in a previous post. In 2022, the 10-stock portfolio declined by 16%, compared to an 18% drop in the S&P 500. In 2023, the portfolio soared by 40%, handily outperforming the S&P 500’s 15% gain.
No strategy outperforms the market every year. The key is to rely on timeless, sound investment principles, and the wide-moat concept has proven to be a reliable framework. For instance, the VanEck Morningstar Wide Moat ETF has delivered an annualized return of 14.75% over the past 12 years. That’s a commendable track record, demonstrating the strategy’s potential to generate strong performance over time.
Second, 2024 has been a standout year for AI-driven stocks, but not all stocks have performed well. The influence of big tech has been particularly pronounced. For instance, the Roundhill Magnificent Seven ETF (MAGS), which focuses solely on the "Magnificent 7" tech stocks, delivered a staggering 66% return over the past year. In comparison, the S&P 500 ETF (SPY) gained 24%, a performance heavily influenced by these same seven stocks.
On the other hand, the Invesco S&P 500 Equal Weight ETF (RSP), which minimizes the dominance of the Magnificent 7, achieved a more modest 11% return. This stark difference highlights how much the big tech stocks contributed to market performance in 2024. Any portfolio underweight in these tech giants would have seen diluted returns.
However, investing solely in the Magnificent 7 stocks is inherently higher risk, and there are no guarantees that their outperformance will continue indefinitely. Interestingly, many of these big tech stocks are also wide-moat stocks, but they are considered overvalued and therefore don’t qualify for the list of 10 undervalued wide-moat stocks.
It’s worth noting that a mean reversion effect could occur in the future, where big tech stock prices decline while others rise. While this scenario may seem unlikely now, it’s a reminder to never rule out the unexpected.
Moreover, given the widespread popularity of big tech investments, many investors are likely already exposed to these stocks to some degree. Diversifying into other areas could make sense as a way to de-risk their portfolios.
With that out of the way, let’s reveal Morningstar’s 2025 list of undervalued wide-moat stocks: