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number cruncher

What are we looking for?

We'll take another look at wide moat stocks today. Part of Warren Buffett's investing strategy is to find companies that have a wide economic moat. These are companies that have a sustainable advantage in the marketplace that protects them from competitive forces. Yesterday, we looked at Canadian companies that qualify for wide-moat status, according to Morningstar. Today, we'll look at Morningstar's top 20 undervalued U.S. moat stocks.

More about today's screen

Morningstar's wide moat focus index is composed of the top 20 U.S. moat stocks with the highest ratios to fair value, as determined by Morningstar analysts. According to Morningstar, it derives fair value by determining "how much capital a company invests, and what return it earns on that capital."

Morningstar also has broken down each company according to what gives the company moat status. The five types of competitive advantages are:

- intangible assets: brands, patents and regulatory licences;

- cost advantage: being able to produce products or services at a lower price than the competition;

- switching costs: allows companies to charge customers more than they would otherwise be able because switching to a new supplier is too costly;

- network effect: the value of a company's product or services increases as more customers are added;

- efficient scale: effectively serving a limited market, where potential competitors have little incentive to enter the market.

What did we find out?

Morningstar's wide moat index has a total return of 4.6 per cent this year, 16 per cent over the last three years and 6.5 per cent over the last five.

Morningstar calculates that the moat factor that has the highest returns on invested capital is the network effect group. Four companies qualify for this, including Autodesk Inc., eBay Inc., Expeditors International of Washington Inc. and Western Union Co.