BOSTON (TheStreet) -- Morningstar (MORN), 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.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV