This week and next, we're presenting 10 core stock ideas -- stocks our writers believe can serve as the foundation for a long-term-focused portfolio.
If you're reading this article, chances are you follow your portfolio more closely than the average investor, and I expect you track your returns against those of a stock market index such as the S&P 500. For professional investors, there are no two ways about it -- they live and die by their performance relative to their benchmark index. MSCI
Company name and ticker |
MSCI |
One sentence statement of operations |
Provides index data and equity risk management solutions to professional investors. |
Recent price |
$33.98 |
Market Cap |
$4.0 billion |
P/E (Next 12 months' EPS) |
21.6 |
ROE |
20.3% |
Source: Capital IQ, a division of Standard & Poor's.
The business
But offering indices as performance measurement tools is not the only way to monetize them; MSCI also licenses them so that exchange-traded fund (ETF) providers such as BlackRock's
At the end of August, AUM in ETFs linked to MSCI indices totaled $259 billion. The index with the highest associated assets is the MSCI Emerging Markets Index, which accounts for more than a quarter of the total.
MSCI's major competitors in the index business are Dow Jones (a unit of News Corp
MSCI's other main business is Equity Portfolio Analytics, which it inherited from its 2004 acquisition of Barra -- the offerings in this area are still branded under the Barra name. Barra's equity return model enables enable investors to optimize their portfolios by breaking stock returns into a set of common factors (style, industry, etc.). The model has gained significant acceptance, to the point where at least one of MSCI's competitors in this area, FactSet Research Systems
Why it's a core stock
Defensible franchise: By definition, when you are hunting for a "core" stock for your portfolio, your first priority must be to ensure that the company has a sustainable competitive advantage. A core stock is one you expect to hold in your portfolio for years to come, and only a lasting competitive advantage can provide above-normal returns over this extended holding period.
Imagine if you had to replicate -- from scratch -- MSCI's comprehensive database of worldwide indices and risk data. In some cases, you'd be required to reproduce indices that go back over 40 years. Do you think that would cheap or easy to do? Of course not! It's an undertaking that would require substantial time, effort, and the sort of expertise that you don't accumulate overnight. MSCI itself did not appear ex nihilo -- it was spun out of Morgan Stanley
Replicating these assets is a formidable barrier to entry that protects MSCI's franchise and enables it to earn high returns on capital, year in and year out.
Recurring revenues with high retention rates: The vast majority of MSCI's revenues are tied to recurring annual subscriptions. These revenues tend to be very "sticky": MSCI's its average aggregate retention rate over the past three fiscal years was 91%. Combine both these characteristics, and you have a highly enviable revenue model.
Risks
Last week, a European fund manager at BlackRock
In sum
At 21.6 times the consensus estimate for the next 12 months' earnings, one would be hard-pressed to call MSCI cheap. Compare that to another high-quality franchise with strong recurring revenues, high returns on capital and low capital needs, Automatic Data Processing
As such, I don't recommend jumping into this stock with both feet at these levels. There is nothing wrong with dipping your toe in and opening a small position, but this is a core stock, so there is no hurry to own it. If you expect these shares to anchor your portfolio for several years, you can afford to be patient and opportunistic in building your position. High-quality franchises like MSCI will almost never look cheap, but if the gap with ADP's current multiple were to close, the shares would certainly warrant a more serious buying commitment.