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.

3. Abbott Laboratories ( ABT) is a health-care company, selling pharmaceutical, diagnostic, nutritional and vascular products.

Fundamentals: Abbott's 12-month sales have risen almost 14%. Third-quarter adjusted earnings per share climbed 14% to $1.05, at the high-end of management's guidance. Revenue grew 12% to $8.7 billion. The operating margin inched up from 23% to 24%. Abbott carried $5.7 billion of cash and almost $19 billion of debt on its balance sheet at quarter's end. Its quick ratio of 0.8 is lower than ideal and a debt-to-equity ratio of 0.9 reflects a large debt load.

Valuation: Abbott's stock sells for a forward earnings multiple of 10, a book value multiple of 3.4, a sales multiple of 2.1 and a cash flow multiple of 8.8, 14%, 31%, 32% and 23% discounts to peer averages. Its PEG ratio of 1.2 suggests that the stock is overvalued based on expected earnings growth. Yet, the stock's trailing earnings multiple of 16 is roughly 35% below the five-year average earnings multiple of 24. Also, Abbott offers a lofty dividend yield of 3.8%.

Fair Value: Morningstar values Abbott at $68, implying the stock is undervalued by 45%.

2. Applied Materials ( AMAT) sells nano-manufacturing equipment to semiconductor, flat-panel-display and solar companies.

Fundamentals: Applied Materials' 12-month sales have surged 90%. Fiscal fourth-quarter adjusted profit multiplied to $476 million, or 36 cents a share, from $155 million, or 11 cents, in the year-earlier quarter. Revenue soared 89% to $2.9 billion. The operating margin more than doubled from 11% to 24%. Applied Materials has a superlative balance sheet, with $2.6 billion of cash and $206 million of debt, converting to a 1.5 quick ratio and a minuscule debt-to-equity ratio.

Valuation: Applied Materials' stock trades at a forward earnings multiple of 10, a book value multiple of 2.3, a sales multiple of 1.8 and a cash flow multiple of 10, 29%, 43%, 48% and 27% discounts to semiconductor industry averages. The stock's PEG ratio of 0.3 signals a 70% discount to estimated long-term fair value. However, a trailing earnings multiple of nearly 19 reflects only a modest discount to the company's five-year average earnings multiple of 20.

Fair Value: Morningstar projects fair value at $22, suggesting 68% of potential upside.

1. Covidien ( COV) makes and sells medical devices, pharmaceuticals and health-care supplies.

Fundamentals: Covidien's 12-month sales have declined 2.3%, though 12-month GAAP net income has gained 80%. Fiscal fourth-quarter adjusted earnings per share stretched 18% to 84 cents. Revenue declined 1% to $1.7 billion. The operating margin extended from 17% to 20%. Covidien's balance sheet stored $1.6 billion of cash and $4.7 billion of debt at the end of the quarter, translating to a quick ratio of 1.1 and a debt-to-equity ratio of 0.5.

Valuation: Covidien's stock sells for a trailing earnings multiple of 14, a forward earnings multiple of 11, a book value multiple of 2.4, a sales multiple of 2 and a cash flow multiple of 9.5, 33%, 42%, 40%, 43% and 35% discounts to health care equipment and supplies industry averages. The stock's PEG ratio of 0.9 represents a 10% discount to estimated fair value. Covidien shares have fallen 10% in 2010, but have rebounded 15% in the past three months.

Fair Value: Morningstar estimates Covidien's fair value at $67, 56% above the current price.

-- Written by Jake Lynch in Boston.

To see these stocks in action, visit the Morningstar's 5-Star Large-Cap Stocks Portfolio on Stockpickr.

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