We recently compiled a list of the 10 Unrivaled Stocks of the Next 10 Years. In this article, we are going to take a look at where Moody’s Corporation (NYSE:MCO) stands against the other unrivaled stocks of the next 10 years.
Growing a business is not an easy task. Several factors come into the picture when you talk about growth. In 2019, McKinsey reported that ~50% of the companies that enjoyed healthy and stable shareholder returns but didn’t see top-line growth were either acquired or delisted. Growth is getting tougher amidst new market dynamics such as higher consumer expectations, competitive intensity, and digital disruption. Growth can only be rewarded to businesses that spot opportunities at hyper-granular levels and then seize them quickly.
Pricing Power Remains Critical, Says Legendary Investor
Warren Buffett, the billionaire CEO of Berkshire Hathaway Inc., mentioned that he tends to rate businesses based on their ability to increase prices. He pays so much attention to the pricing power that he sometimes doesn’t even consider the people who are managing the business. Buffett has had a successful career of stock picking and takeovers.
The veteran investor has bought companies in the business of railroads and electricity producers, whose pricing power comes from a dearth of competitive options available to their clients. Buffett has also built stakes in several consumer discretionary companies relying on the appeal of their brands to bring in customers.
Forecasts for 2024
Wall Street analysts expect that S&P 500 companies are expected to report steady earnings growth in 2024. They anticipate a ~5.4% earnings growth in 3Q 2024 and over ~15% earnings growth in 4Q 2024. The S&P 500’s forward price-to-earnings ratio sits at ~22.40x as of August 30. The 10-year average forward price-to-earnings ratio came at ~17.9x, suggesting that the stock valuations might be slightly stretched.
Moving forward, the US presidential election remains the most significant potential market catalyst for 2H 2024. Landsberg Bennett Private Wealth Management believes that inflation numbers might surprise to the upside towards the end of 2024 and into 2025. This is because year over year comparables might become more difficult and the effects of increased Chinese shipping rates start reflecting in the inflation data points.
Equity Market Outlook Amidst Uncertain Macro-Economic Environment
A “higher-for-longer” backdrop favoured larger and higher-quality companies that are less cyclical and rate-sensitive. Such companies were supported by mania in Artificial Intelligence/Large Language Models (AI/LLM) stocks. JPMorgan believes that, in the US equities, momentum crowding and stock market concentration reached multi-decade extremes.
Market volatility in the US remains low, with VIX averaging only ~14 for the year to July 2024. This was mainly because of fundamental and technical factors, such as rising markets, risk complacency, and lower realized correlation, among others.
In Europe and other areas, the broader equities were supported by improved economic activity and the expectation of multiple Fed cuts at the start of 2024. However, the growth-policy trade-off might worsen in 2H 2024. JPMorgan believes that “there is a risk of disappointment.” The large bank expects that the Fed might stay ‘higher-for-longer,’ US activity momentum might decelerate and there can be a softening of pricing and top-line growth. Collectively, this might hurt earnings delivery in 2H 2024. Therefore, investing in stocks with wide economic moats and companies having significant market share should help offset the losses in the remainder of 2024.
Our methodology
To list 10 unrivaled stocks of the next 10 years, we sifted through wide moat ETFs and checked online rankings. Next, we narrowed our list by filtering out the companies that have held a near-monopoly status for years or decades. Finally, we ranked the stocks in ascending order of the number of hedge funds that hold them, as of 2Q 2024
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A hand holding a rating chart, emphasizing the importance of credit ratings in the financial services sector.
Moody’s Corporation (NYSE:MCO)
Number of hedge fund holders: 59
Moody’s Corporation (NYSE:MCO) is the leading provider of credit ratings on fixed-income securities. Moody’s ratings segment, Moody’s Investors Service or MIS, consists of corporates, structured finance, financial institutions, and public finance ratings.
Moody’s Corporation (NYSE:MCO) is one of Warren Buffett’s favorite stock picks mainly due to its near-monopoly position in the credit ratings business and resilient business structure which sustains any business environment. This is because individual loans and corporate bond assignments tend to increase during a low-interest rate environment. When interest rates are high, the company gets corporate risk management work.
Moody’s Corporation (NYSE:MCO) enjoys a wide economic moat, given its capabilities in Analytics and Investor Services segments, with elevated margins, recurring revenue, and numerous growth opportunities. The company has built a strong reputation and uses advanced financial models that are difficult to copy. Apart from these factors, its brand reputation, technological innovation SaaS offerings, and pricing power contribute to its wide economic moat. In 2021, the company’s management confidently increased the pricing of its ratings offering. This was done to mitigate the impact of inflation. The increased borrowing due to the pandemic ensured strong demand and companies paid the extra price of the ratings.
The company saw strong financial performance for 2Q 2024, with Moody’s Analytics business’ revenue growing 7% from the prior-year period due to strong demand for Moody’s proprietary data and unique analytical insights.
Analysts at Barclays raised the price target on shares of Moody’s Corporation (NYSE:MCO) from $450.00 to $500.00, giving it an “Overweight” rating on 24th July. At the end of Q2 2024, 59 hedge funds in Insider Monkey’s database owned stakes in Moody’s Corporation (NYSE:MCO).
Overall MCO ranks 9th on our list of the unrivaled stocks of the next 10 years. While we acknowledge the potential of MCO as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than MCO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
