Why Moats Matter: The Morningstar Approach to Stock Investing

"The search for the enduring economic moat is the holy grail of value investing. These modern-day protected business castles allow their owners to earn high returns on capital, the ultimate goal for any long-term investor. In Why Moats Matter , Heather Brilliant and Elizabeth Collins provide a wonderfully detailed map to help both small and large investors find these great companies." John W. Rogers Jr. , founder, chairman, and chief investment officer, Ariel Investments "Morningstar's Economic Moat framework is a useful complement to Michael Porter's five forces model, as it approaches the issue of franchise quality from an investor's perspective. Armed with Morningstar's moat framework, I've been able to make better assessments of companies' competitive positions, which is a critical element of my stock-picking process." Michael Luciano , investment analyst and U.K. pilot fund manager, Fidelity Worldwide Investment

Preface Chapter One: Guiding Principles of Morningstar’s Equity Research Question 1: How can we identify which businesses are great? Question 2: When is the best time to invest in great businesses? Chapter Two: What Makes a Moat? Moat Sources Notes Chapter Three: Why Moat Trends Matter Contributed by Stephen Ellis, a member of Morningstar’s Economic Moat Committee and head of Financial Services equity research at Morningstar Moat Trends and Fundamental Performance Five Key Considerations for Moat Trends Intangibles CostAdvantage Switching Costs Network Effect Efficient Scale Best Practices for Moat Trend Analysis Chapter Four: How Stewardship Affects Economic Moats Contributed by Todd Wenning, who oversees Morningstar’s equity stewardship methodology Meet Our Stewardship Methodology Drilling Down Chapter Five: Applying Moats to Dividend Investing Contributed by Josh Peters, Chief Equity Income Strategist for Morningstar and editor of the Morningstar DividendInvestor newsletter Why Dividends Matter Which Dividends? Chapter Six: The Importance of Valuation Contributed by Joel Bloomer, Matt Coffina, and Gareth James, members of Morningstar’s Moat Committee and contributors to Morningstar’s valuation methodology. Valuation Concepts Cost of Capital and Returns on Capital Morningstar’s Valuation Approach Example: Calculating ROIC Forecasting Future Free Cash Flows The Morningstar Rating for Stocks Fair Value Uncertainty and Cost of Equity Notes Chapter Seven: Do Moat Ratings Predict Stock Returns? Contributed by Warren Miller, Head of Quantitative Research at Morningstar Chapter Eight: Putting Moat and Valuation to Work: Portfolio Strategies Wide Moat Focus Index The Tortoise and Hare Portfolios Chapter Nine: Basic Materials Commodity Manufacturers Commodity Processors Metals and Mining Chapter Ten: Consumer Beverages Consumer Defensive—Consumer Products Tobacco Restaurants Retail Defensive Specialty Retail Lodging Notes Chapter Eleven: Energy Oil and Gas Drilling Oil and Gas Exploration and Production Oil and Gas Midstream Refining Oil & Gas Integrateds Engineering Services Chapter Twelve: Financial Services Banks Capital Markets Credit Services Financial Exchanges Insurance Chapter Thirteen: Healthcare Pharmaceuticals Biotechnology Medical Devices Medical Instruments and Supplies Diagnostics and Research Chapter Fourteen: Industrials Railroads Airport Operators Aerospace and Defense Truking and Marine Shipping Waste Management Heavy Equipment Diversified Industrials Chapter Fifteen: Technology Consumer Technology Enterprise Hardware Systems IT Services Semiconductors Software Telecom Services Chapter Sixteen: Utilities Regulated and Diversified Utilities Independent Power Producers About Morningstar Index 

Heather E. Brilliant, CFA Co-Chief Executive Officer Morningstar Australasia 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 chairman of the CFA Society of Chicago. Elizabeth Collins, CFA Director of Equity Research, North America Morningstar 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. 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. 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