40 of the Best Investment Picks

Morningstar celebrates its 40th anniversary this week. In 1984, Morningstar founder Joe Mansueto began a quest to bring some much-needed transparency to the nascent mutual fund industry. He published quarterly “sourcebooks” that gave investors access to data and information that had been out of reach. Eventually, Morningstar launched its ubiquitous “star rating” for mutual funds, providing a visual representation of risk-adjusted historical return.

Over time, Morningstar began analyzing closed-end funds, variable annuities, ADRs—and eventually stocks and exchange-traded funds, too. Additional investor-friendly innovations soon followed: the Morningstar Style Box, meaningful fund category comparisons (rather than the prospectus objective), the Morningstar Rating for stocks, and Morningstar Medalist Ratings for funds, to name just a few.

By bringing an independent voice that focused on clarity, costs, and long-term outcomes, Morningstar helped investors build confidence. To this day, Morningstar’s mission is to empower investor success. And that mission continues to motivate the company’s longtime employees (like me).

To celebrate, here’s a sampling of some of the best investments across stocks, funds, and ETFs that epitomize Morningstar’s approach to investing—40 ideas in total, divided equally between stocks and funds.

20 of the Best Stocks to Buy

These stocks all earn Morningstar Economic Moat Ratings of wide and Morningstar Capital Allocation Ratings of Exemplary and trade at 4- and 5-star ratings, which means they’re undervalued. Data is as of May 7, 2024.

1. Adobe ADBE
2. Ambev ABEV
3. Anheuser-Busch InBev BUD
4. Autodesk ADSK
5. Bristol-Myers Squibb BMY
6. Brown-Forman BF.B
7. Core Laboratories CLB
8. JD.com JD
9. MarketAxess Holdings MKTX
10. Nike NKE
11. Polaris PII
12. Rentokil Initial RTO
13. Roche RHHBY
14. Starbucks SBUX
15. Tencent Holdings TCEHY
16. Toronto-Dominion Bank TD
17. TransUnion TRU
18. U.S. Bancorp USB
19. Veeva Systems VEEV
20. Zimmer Biomet ZBH

Put simply, our approach to stock investing is to buy shares of great businesses at a discount to their worth. Great companies are those with solid competitive advantages that allow them to earn high returns on capital for years to come. These companies have carved out economic moats stemming from one (or more) of five sources of competitive advantage. We assign wide economic moat ratings to companies that we expect to outearn their costs of capital for at least 20 years.

We value companies by estimating their underlying cash flows. We’re therefore looking at a company’s fundamental value and where a stock is trading relative to that value—not where the stock is trading relative to its historical price or its competition—when calculating our fair value estimates. Moreover, to assign our Morningstar Rating, we take into account the predictability of a company’s future cash flows—the Morningstar Uncertainty Rating. A stock with higher uncertainty requires a larger margin of safety before earning a 4- or 5-star rating.

We think how adeptly management makes capital allocation decisions is an important consideration when buying a company’s stock, too. Why does that matter? Because capital allocation decisions impact overall shareholder returns. The Morningstar Capital Allocation Rating considers how company management has managed the balance sheet, investments, and shareholder distributions. Those management teams that have done an outstanding job of allocating capital and that we expect to continue to do so are awarded an Exemplary rating; those teams that have done a weak job are given a Poor rating. Most management teams receive a Capital Allocation Rating of Standard

20 of the Best Funds to Own

These funds land in the large-blend Morningstar Category, which makes them good core holdings for many investors. These no-load funds and ETFs earned Morningstar Medalist Ratings of Gold with 100% analyst coverage as of May 7, 2024.

1. Dimensional US Core Equity 1 ETF DCOR
2. Dimensional US Core Equity 2 ETF DFAC
3. Fidelity 500 Index FXAIX
4. Fidelity Total Market Index FSKAX
5. iShares Core S&P 500 ETF IVV
6. iShares Core S&P Total U.S. Stock Market ETF ITOT
7. Parnassus Core Equity PRBLX
8. Primecap Odyssey Stock POSKX
9. Schwab U.S. Broad Market ETF SCHB
10. Schwab S&P 500 Index SWPPX
11. SPDR Portfolio S&P 1500 Composite Stock Market ETF SPTM
12. SPDR Portfolio S&P 500 ETF SPLG
13. T. Rowe Price Dividend Growth PRDGX TDVG
14. Vanguard Dividend Appreciation ETF VIG
15. Vanguard Dividend Growth VDIGX
16. Vanguard Large-Cap ETF VV
17. Vanguard Primecap VPMCX
18. Vanguard Primecap Core VPCCX
19. Vanguard S&P 500 ETF VOO
20. Vanguard Total Stock Market ETF VTI

Unlike the historical Morningstar Rating for funds (or “star rating”), the Morningstar Medalist Rating is a forward-looking analysis of a mutual fund or ETF’s likelihood to outperform. Funds that receive Gold, Silver, or Bronze ratings are expected to outperform over a full market cycle. To arrive at the rating, our analysts examine a mutual fund or ETF’s investment process, management team, and parent company, along with costs and long-term performance.

The following pillars are used to designate an appropriate Medalist Rating for each respective fund:

Parent Pillar: This pillar analyzes the parent organization in charge of managing the fund.

People Pillar: This pillar evaluates the managers who are responsible for making key decisions regarding the fund.

Process Pillar: This pillar determines whether the strategy that a parent organization applies to a fund is both effective and repeatable.

Both active and passive mutual funds and ETFs can earn top ratings from Morningstar; if a fund is active or passive doesn’t drive the rating. Funds with Gold, Silver, or Bronze ratings tend to have modest costs and repeatable processes, whether they’re directly tracking an index or actively run by managers.