Companies with durable competitive advantages are more likely to compound in value over long stretches of time. This is because this advantage or moat protects their profits and returns on investment from competition.

Shares in businesses of this quality usually trade at a premium price. The only real chance investors will have to buy shares at lower valuations is when some kind of problem—real or perceived—arises and investors sell the shares.

‘Buying the dip’ can prove beneficial if the problem turns out to be temporary and the business recovers. If the problem turns out to be permanent, though, the purchase could end up proving too expensive.

The challenge, then, is figuring out whether it is a temporary or permanent issue.

The three stocks covered in this article have all been assigned Wide Moat ratings. This means our analysts think they have structural advantages enabling them to earn excess returns on capital for at least 20 years.

All three companies have had a tough time of it recently in the stock market. But in all three cases, our analysts think that the shares have now fallen to a level significantly below Fair Value.

As a result, their weak share prices could provide an attractive ‘buy the dip’ opportunity for long-term investors.

Before we start, I would like to remind you that buying any investment should only follow the construction of a deliberate investment strategy. You can find a step-by-step guide to forming a strategy here.

You can also find an explanation of terms like Moat, Fair Value and Star Rating at the foot of this article. Now, onto the shares.

Chipotle Mexican Grill (NYS:CMG)

  • Moat rating: Wide
  • Fair Value estimate: USD 46 per share
  • Share price September 10: USD 39.46
  • Star rating: ★★★★

Chipotle (CMG) is one of the US’s leading quick service restaurant brands. It has around 3700 US locations, most of which are company owned rather than franchised. Longer term, the company is targeting 7000 US locations and international expansion.

Non-existent switching costs and fickle consumer tastes mean that moats are usually hard to come by in the food business. However, a small number of players have built the brand equity and scale to warrant one – and we think Chipotle is one of them.

The surest sign of this? Chipotle has managed to rack up median same-store sales growth of almost 9% per year over the last five years, with revenues outpacing inflation over a period of unusually high cost increases.

This, Dan Su says, has been enabled by Chipotle’s strong brand and its continued ability to drive guest traffic, attract loyalty programme members, and push through menu price increases when they are needed to support store economics.

Despite being one of the best performing US stocks of the past two decades, Chipotle shares have hit a rough patch recently.

In fact, they have fallen by a third since July 1 on fears that American diners are tightening their belts amid economic uncertainty. These concerns appear to have been warranted given a slowdown in more recent sales numbers, but Dan thinks the long-term outlook remains rosy.

Chipotle’s attractive unit economics pave the way for more expansion, she says, with the target of 7000 US stores readily achievable. Meanwhile, the continued rollout of Chipotlane drive-thru formats and a push towards mobile ordering could continue to support store economics.

At recent prices of around USD 39.50 per share, Chipotle traded in four-star territory at almost a 15% discount to Dan’s Fair Value estimate of USD 46.

A case of being able to buy a wonderful company at a fair price, perhaps, as opposed to being a deep value play.

United Parcel Service (NYS:UPS)

  • Moat rating: Wide
  • Fair Value estimate: USD 118
  • Share price September 10: USD 84.40
  • Star rating: ★★★★

UPS (UPS) is one of the big three commercial parcel delivery companies worldwide, along with FedEx and DHL.

Our analyst Matthew Young awards the company a wide moat from the cost advantages and efficient scale enjoyed by its global delivery network.

Funding a sprawling network of vehicles, sorting facilities and employees without a critical mass of parcels flowing through it is a money pit, Matthew says, and provides a daunting barrier to entry.

For much of the past two decades, UPS enjoyed the tailwind of e-commerce growth supporting package volumes. This hasn’t gone away, but Covid pulled a lot of growth forward and ultimately set the stage for investor disappointment in recent years. Add in some uncertainty over the US economy and concerns over Amazon’s move to slash its use of UPS services in half, and the shares have now completed something of a round-trip.

At recent prices of under USD 85, UPS shares are now cheaper than they were in March 2020 and currently trade almost 30% below Matthew’s USD 118 estimate of Fair Value. The shares currently have a Star Rating of four and a forward dividend yield approaching 8%.

Adobe (NAS:ADBE)

  • Moat rating: Wide
  • Fair Value estimate: USD 560
  • Share price September 10: USD 354
  • Star rating: ★★★★

Adobe (ADBE) is best known for its iconic Photoshop and Illustrator software packages for creatives, which are offered alongside newer products like its Firefly AI design tool as part of the company’s Creative Cloud subscription.

Creative Cloud remains the industry standard for content creators and provides Abode with around 50% of its total revenue. However, there is a lot more to Adobe besides Photoshop and Illustrator.

The main source of growth is expected to be Digital Experiences, which combines several products – including Adobe Commerce (formerly Magento), Adobe Experience Manager and Adobe Analytics – into an integrated suite of digital business tools.

This business has largely been built through acquisition, and our analyst Dan Romanoff thinks it represents a solid cross-selling opportunity as companies look to consolidate vendors. After all, most companies use Adobe’s Creative or Document Cloud products.

Dan’s Wide Moat rating for Adobe stems from a stand-alone Wide Moat rating for the company’s Digital Media segment, which includes the Creative Cloud and Document Cloud businesses.

He sees Creative Cloud’s position as the creative software of choice as virtually unassailable. Meanwhile, Document Cloud continues to find ways to leverage Adobe’s creation of the ubiquitous PDF format and Acrobat suite all those years ago.

As for the Digital Experiences segment, Dan notes that Adobe doesn’t have the advantage of being the first-mover or industry standard here and faces more competition. Nonetheless, he would award it a Narrow Moat due to switching costs.

Adobe shares have had a year to forget amid concerns that AI creative tools could threaten its dominance in the design software space. Dan clearly disagrees with that take, meaning that the 40% fall in shares over the past year could spell opportunity.

Dan expects that Adobe will be able to record revenue growth of 10% per year over the next five years and for profit margins to expand modestly with scale. He thinks the shares are worth USD 560 compared to recent prices of closer to USD 350.

Don’t forget

Before you get to choosing investments, we recommend you form a deliberate investing strategy. You can read more about how to form your strategy here.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.