3 High-Quality Stocks Top Money Managers Are Buying

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Each quarter, we take a look at the recent transactions of some of the top money managers around today—who we call our Ultimate Stock-Pickers.

Last quarter, three stocks were high-conviction purchases for at least six of our favorite managers. What’s considered a high-conviction purchase? A high-conviction purchase is one that makes a meaningful addition to a portfolio, as measured by the size of the purchase in relation to the size of the portfolio.

All three of the high-conviction purchases last quarter that we’re looking at today were from the financial services sector.

3 High-Quality Stocks Top Money Managers Are Buying

1. Charles Schwab SCHW
2. Bank of America BAC
3. Visa V

The first high-conviction stock purchase among nine of our Ultimate Stock-Pickers last quarter was Charles Schwab SCHW. The stock took a hit in March as the regional banking crisis unfolded and the stock remains down more than 30% this year. While Schwab does have a related banking entity, we’re comfortable with its liquidity and capital levels. However, Schwab’s funding costs are moving up, which will pressure revenue growth and operating margin expansion. We reduced our fair value estimate on Charles Schwab stock by nearly 20% during the first quarter, reflecting our forecast of lower net interest income. Morningstar’s analyst expects the trajectory of earnings to look like a checkmark, with a near-term decline and longer-term uptrend. The wide-moat stock remains undervalued today by our standards; we think shares are worth $70 apiece.

Six of our Ultimate Stock-Pickers made a high-conviction purchase of Bank of America BAC stock during the first quarter. After a decade of missteps, Bank of America is now regarded as one of the preeminent U.S. banking franchises, and Morningstar awards the bank a wide Morningstar Economic Moat Rating. Bank of America boasts one of the best retail branch networks, is a top-four U.S. credit card issuer, and owns the Merrill Lynch franchise. The bank’s first-quarter earnings met expectations, with its deposit base and funding costs tracking as expected. Although Morningstar expects net interest income to decline and we continue to refine our forecasts, we currently assign Bank of America stock a $37 fair value estimate and think the shares are undervalued.

And lastly, six Ultimate Stock-Pickers made sizable moves into Visa V stock last quarter. Visa is the largest payment processor in the world. Morningstar’s analyst says that Visa is a relatively unique company, in that it is a longtime, established market leader that still enjoys strong growth prospects. We assign Visa a wide economic moat rating, and expect that the trend toward electronic payments will continue to drive Visa’s growth for the foreseeable future. Visa enjoyed volume growth in the first quarter despite macroeconomic uncertainty, but we wouldn’t be surprised if volume growth slows over the short term, given economic conditions. We think shares are about fairly valued as they trade near our $241 fair value estimate.

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Strategist Eric Compton, sector director Michael Wong, senior analyst Brett Horn, and associate analyst Ari Felhandler provided the research behind this segment.

Watch “Warren Buffett Bought These 4 Stocks. Should You?” for more from Susan Dziubinski.

Editor’s Note: A video published on Morningstar.com and YouTube on May 22 and May 23, 2023, about Berkshire Hathaway’s first-quarter purchases contained incorrect information. Berkshire did not add to its positions in Apple and Bank of America during the first quarter. The video has been removed.