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Morningstar's 5-Star Large-Cap Stocks for 2011

BOSTON ( TheStreet) -- Morningstar (MORN - Get Report), known for its mutual-fund ratings, also offers first-rate equity research. The analysis firm bestows its highest five-star rating on only 31 of the 1,700 stocks it covers. Key is a company's "moat", a sustainable competitive advantage that keeps rivals at bay, and its ability to generate cash flow, not earnings.

Morningstar is value-focused, seeking stocks that sell at a discount to their intrinsic fair value. Given this orientation, it's no wonder that many of its current favorites are historically cheap large-cap equities. Below is a closer look at four of Morningstar's five-star large-cap stock picks heading into 2011.

4. Medtronic (MDT) sells medical devices, diagnostic equipment and monitoring equipment.

Fundamentals: Medtronic's 12-month sales have increased 4%. Fiscal second-quarter adjusted net income gained 4% to $887 million and adjusted earnings per share climbed 6% to 82 cents. Revenue inched up 1.7%. The operating margin narrowed from 32% to 31%. Medtronic held $3.5 billion of cash and nearly $11 billion of debt at the end of the quarter, translating to an ample quick ratio of 1.2 and a reasonable debt-to-equity ratio of 0.7.

Valuation: Medtronic's stock trades at a forward earnings multiple of 9.3, a book value multiple of 2.5, a sales multiple of 2.3 and a cash flow multiple of 8.3, 50%, 38%, 35% and 43% discounts to health care equipment and supplies industry averages. Its PEG ratio, a measure of value relative to growth, of 0.5 reflects a 50% discount to estimated fair value. The stock's trailing earnings multiple of 12 is 40% below the five-year average earnings multiple of 20.

Fair Value: Morningstar clocks fair value at $46, suggesting a 34% discount.

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