5 Stocks With More Room to Run – Morningstar.com

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Yet several stocks have returned at least twice as much as the S&P 500 this year but still trade in 4-star range, which suggests that these stocks remain undervalued. Here are five such high fliers that may have more gas left in the tank. Guidewire Software
Year-to-date return: 48.29%
Rating: 4 stars
Economic moat: Wide
Uncertainty: Medium”Guidewire remains one of the most compelling stories in enterprise software in our view,” writes analyst Rodney Nelson in his latest note. “We believe investors should be taking a close look at the stock.”Guidewire creates solutions specifically for property and casualty insurers. The company has become a global leader in replacing insurers’ proprietary legacy systems, which lack efficiency, data integrity, and policyholder engagement. Guidewire’s solutions are scalable and deployable either on-premises or via the cloud, explains Nelson. The company earns a wide economic moat, having quadrupled the customer totals of its nearest competitors.”We are encouraged by Guidewire’s growing presence at the top of the market, and there remains a long runway for growth, evidenced by the firm’s licensing of 20% penetration of global direct written premiums to at least one application,” says Nelson. “We expect the firm to continue to win the bulk of new projects while penetrating additional business lines and selling add-on modules to its current customer base.” Millicom International Cellular
Year-to-date return: 60.90%
Rating: 4 stars
Economic moat: Narrow
Uncertainty: High”Despite the significant run the stock has had this year we continue to believe the shares are undervalued,” says senior analyst in Allan Nichols in his latest report on the company. The international telecom and media company has focused on smaller countries than some of its larger peers. For instance, the firm is the largest wireless operator in Guatemala, El Salvador, Honduras, Paraguay, and Chad, as well as the largest pay-television operator in Costa Rica. It is the second- or third-largest operator in the rest of the countries it operates in. Because of their relatively small size, these countries have seen lower competition among operators, says Nichols.

“The lower competition and Millicom’s early entrance have enabled the firm to generate excellent returns on capital in Latin America,” says Nichols. “Because of the small size of most of the markets in which Millicom operates, it would be very difficult for another operator to enter the market, build out a network, and generate a decent profit.” 

As a result, Morningstar assigns the company a narrow economic moat.

“While the firm isn’t large on a global scale, it is large in most of the countries it operates in. Scale in a country is generally more important than global scale for controlling costs in that country.”Salesforce.com
Year-to-date return: 51.67%
Rating: 4 stars
Economic moat: Wide
Uncertainty: Medium”We continue to view Salesforce as one of the most attractive profitable growth stories in software,” says senior analyst Rodney Nelson in his latest report on the company. “We think shares remain attractive.”A pioneer in software-as-a-service, Salesforce.com today is one of the world’s software powerhouses, says Nelson. The company’s product portfolio spans several layers of customer relationship management, and it delivers its solutions via the cloud, allowing for speedy deployments and updates, and lower cost of ownership for its clients. Morningstar assigns Salesforce.com a wide moat. “The firm’s software lineup has grown from a singular salesforce automation product to a suite of offerings spanning customer relationship management, digital marketing, campaign management, customer service, analytics, and application development, making it the largest pure-play software-as-a-service company in the world by many multiples,” notes Nelson.Granted, Salesforce.com will continue to feel the heat in the cloud from the likes of  Microsoft ,  Oracle , and SAP . Nevertheless, concludes Nelson: “Salesforce.com’s SaaS prowess and broadening application portfolio will propagate the firm’s rise in the global software market.”Vertex Pharmaceuticals
Year-to-date return: 91.11%
Rating: 4 stars
Moat rating: Narrow
Uncerrtainty: Medium”The stock saw a meteoric rise this summer after impressive first-in-human results from its triple-combination drug program, which would unlock the next largest cystic fibrosis patient opportunity for the firm,” writes analyst Kelsey Tsai about Vertex in her latest company report. “However, after factoring in this significant derisking event, additional upside remains, in our view.”Vertex was once best known for HCV drug Incivek. Today, the firm’s future is tied to its rich cystic fibrosis portfolio, which includes a combination of approved and pipeline treatments. Thanks to this near-monopoly in the cystic fibrosis market and lengthy patent protection, Vertex has established a narrow economic moat, and Tsai says the company should remain the leader in this space for the foreseeable future. In fact, Morningstar estimates that the company’s cystic fibrosis program could exceed $8.5 billion in our forecast period. All told, Vertex is poised to become a rare-disease powerhouse.”Overall, we think Vertex’s top line will average 25% compounded annual growth during the next five years, driven primarily by blockbuster sales of its CF franchises,” says Tsai. “We think rising product sales will propel the firm to profitability by 2018 and ultimately drive operating margins above 50% with returns on invested capital near 40% by 2021.” Volkswagen
Year-to-date return: 50.19%
Rating: 4 stars
Moat rating: None
Uncerrtainty: High”In our opinion, the 4-star-rated shares of Volkswagen offer investors compelling valuation,” says senior analyst Richard Hilgert in his latest note, “but we caution that the stock is only appropriate for those who are willing to accept the risk of volatility from potential negative headlines regarding diesel and antitrust investigation issues.”Indeed, uncertainty regarding the diesel engine scandal continues to plague the automaker. However, Hilgert says that despite the scandalous claims, global demand remains strong for Volkswagen’s products. Moreover, he thinks that the company is successfully executing against its strategy. The company’’s operations are geographically diverse and profitable, and its broad array of brands reduces its reliance on any one vehicle category. Like other automakers, however, Volkswagen hasn’t established an economic moat, in our view, due to a lack of barriers to entry. And although Volkswagen enjoys premium pricing in many markets, with its Bentley, Bugatti, and Lamborghini brands evoking images of luxury, other competitors have similar perceived value, as well. Nevertheless, the Volkswagen brand is a strong one. “With an enviable portfolio of brands, a bevy of new and redesigned model introductions, and leading shares in many of the world’s markets, as well as a healthy pile of cash, we think Volkswagen is well buffered to endure potentially substantial fines and judgments,” concludes Hilgert.