Morningstar's Financial Trio

05/23/2014 9:00 am EST

Focus: STOCKS

Matthew Coffina

Editor, Morningstar Stock Investor

Three of my favorite stocks for new money this month are in the financial services sector, explains Matthew Coffina, editor of Morningstar StockInvestorand manager of the service’s Tortoise and Hare model portfolios.

BlackRock (BLK) is the newest addition to the Hare. I think the company has a very wide moat, with some contribution from all five of Morningstar’s moat sources: intangible assets, switching costs, network effects, cost advantages, and efficient scale.

In the short run, BlackRock’s performance should be similar to that of a broadly diversified, global balanced mutual fund, except more volatile. The stock’s beta has historically been around 1.25–1.5.

However, I believe BlackRock has certain structural characteristics that make it very likely the stock will outperform the S&P 500 (SPX) over longer holding periods, perhaps by 5 percentage points or more per year.

I raised our stake in MasterCard (MA) by 50% last month, putting the stock among the Hare’s top five holdings by position size. If the discount to fair value widens further, I will gladly buy more.

I expect MasterCard to deliver long-run revenue growth of 8%–12% per year thanks to a combination of rising global personal consumption expenditures and the secular shift to electronic payments.

Combined with operating leverage and share repurchases, this should enable MasterCard to achieve mid-teens annual earnings per share growth without breaking a sweat.

The pace and sustainability of growth—as well as the superwide moat—make MasterCard worthwhile even with a relatively high price/earnings multiple.

Both BlackRock and MasterCard will inevitably face some bumps in the road—economic uncertainty for MasterCard; stock and bond market volatility for BlackRock—which could create better buying opportunities in the future.

However, over a long enough time horizon, I think both stocks are very likely to outperform the S&P 500. They offer reasonable valuations, abundant free cash flow, and sustainable double-digit earnings per share growth—and most importantly, very wide moats.

We recently upgraded our moat trend rating for Berkshire Hathaway (BRK-B) to stable. Our previous negative trend rating reflected concerns about Warren Buffett’s longevity as well as the difficulty of achieving returns in line with historical norms given Berkshire’s size.

However, I think it’s more important for investors to focus on the competitive positions of Berkshire’s underlying businesses—which, by and large, are stable.

We also increased our fair value estimate by $7 per share to incorporate more optimistic growth and profitability assumptions for the railroad and utility subsidiaries. I expect Berkshire to remain the Tortoise portfolio’s largest position for the foreseeable future.

Although I expect management to continue creating value through new acquisitions and investments, this isn’t necessary for Berkshire to be a worthwhile holding: the company’s existing businesses more than justify the current stock price.

Subscribe to Morningstar StockInvestor here…

More from MoneyShow.com:

Wide Moats

Still Betting on Buffett

Find Companies with Wide Moats

Related Articles on STOCKS