Best Value Stocks to Buy for Jan.13: A Value Investor's Guide to Wide-Moat Companies Trading Below Intrinsic Value

The market's mood has changed. For years, it felt like walking through a casino where almost every table was paying out. From 2020 through 2024, simply "putting chips on the table" worked unusually well, with more than half of S&P 500 companies delivering annualized returns above 15%. That era is ending. As 2025 winds down, around 40% of the S&P 500 is heading for a negative year. This shift in the odds is the core of how we're thinking about 2026. The coming year looks less like a casino and more like an investor's market.

The key metric signaling this transition is valuation. The S&P 500's price-to-earnings ratio stands at 31. That is a level reached only a few other times in history. While not an immediate signal for a crash, it does mean that the market's best opportunities are likely elsewhere. Stretched valuations in mega-cap tech and growth stocks, which drove returns in recent years, have left little margin of safety. The concentration is extreme, with the top 10 positions accounting for roughly 40% of the index. When prices are this high, the odds of a swift rotation out of these stocks increase.

This sets up a classic value opportunity. In an "investor's market," the winning strategy is no longer chasing every hot trade. It is sizing positions thoughtfully and focusing on high-probability outcomes. That means disciplined selection of high-quality businesses-those with wide moats and durable competitive advantages-trading at a discount to their intrinsic value. The era of effortless gains is over. For patient capital, the path forward is clear: hunt for value.

Identifying the Wide Moat: The Value Investor's Screening Process

The foundation of any value strategy is a clear definition of what we are buying. For a disciplined investor, the target is not just any company, but one with a durable competitive advantage-a "wide moat." This concept, popularized by Warren Buffett, describes a business that possesses a lasting edge over rivals, much like a castle's moat protects it from invaders. These advantages can take many forms: a powerful brand that commands loyalty, a cost structure so efficient that competitors cannot match it, high customer switching costs, or regulatory barriers that create high entry costs for new players. The result is a company that can sustain superior profitability over the long term, shielded from the erosive effects of competition.

The Morningstar Wide Moat Focus Index provides a practical tool for hunting these businesses. It tracks companies that have been rated as having a "wide" economic moat by Morningstar analysts, combined with a critical second filter: they must be trading at a significant discount to the firm's own estimate of intrinsic value. As of September 2025, the most undervalued stock in the index was trading 41% below its fair value estimate. This dual-screen-quality plus price-is the essence of value investing. It focuses the search on high-quality businesses that are currently being overlooked by the market.

Financial health is the other pillar of this screening process. A wide moat is a powerful asset, but it needs a strong balance sheet to weather storms and seize opportunities. We look for companies with sound balance sheets and consistent cash flow generation. This financial resilience acts as a buffer against volatility and economic uncertainty, allowing the business to compound value through cycles. It ensures the company can fund its own reinvestment, maintain dividends, and avoid distress during downturns. In the current market, where stretched valuations in mega-cap tech have left little margin of safety, this combination of durable competitive advantage and solid financial footing becomes the most reliable path to long-term wealth creation.

Concrete Examples: Wide-Moat Stocks Trading Below Fair Value

The screening process outlined earlier points to a specific set of high-quality businesses. The Morningstar Wide Moat Focus Index, which tracks companies with wide economic moats trading at the lowest prices relative to fair value, provides concrete examples. As of September 2025, the index highlighted several names that embody the value investor's ideal: durable competitive advantages coupled with a significant discount to intrinsic worth.

The most striking case was Constellation Brands. The company was trading 41% below its fair value estimate at that time, a discount that represents a classic value opportunity. For a disciplined investor, this gap suggests the market is overlooking the company's wide moat, which includes a portfolio of premium beverage brands.

Other prominent examples showcase different forms of competitive strength. Adobe and Nike are archetypes of powerful brand moats. Adobe's dominance in creative software creates high customer switching costs, while Nike's global brand loyalty and integrated retail network provide a formidable barrier to entry. Both companies also benefit from recurring revenue streams-Adobe's subscription-based Creative Cloud and Nike's direct-to-consumer model-which enhance predictability and cash flow. These characteristics are the hallmarks of a wide moat in action.

In the healthcare sector, Bristol-Myers Squibb and Merck represent wide-moat pharmaceutical companies. Their moats are built on decades of research, regulatory expertise, and extensive patent-protected pipelines. The key for investors here is the pipeline's ability to sustain earnings growth through the inevitable expiration of blockbuster drugs, a critical factor for long-term compounding.

These five stocks-Constellation, Adobe, Nike, Bristol-Myers Squibb, and Merck-serve as concrete instances of the screening process. They are not random picks but names that have passed Morningstar's rigorous test of quality and price. They represent the fertile hunting ground for long-term investors seeking high-quality stocks trading at cheap prices, where the margin of safety is not just a hope but a quantifiable discount.

Evaluating the Picks: Applying Value Investing Principles

The Morningstar Wide Moat Focus Index provides a clear framework for this analysis. It doesn't just identify high-quality businesses; it quantifies the gap between price and value. For the value investor, the process is straightforward: assess the durability of the moat, calculate the margin of safety, and then project the business's ability to compound earnings over a long cycle. Let's apply this mental model to the examples.

First, consider the moat itself. A wide moat is not a static asset; it must be able to defend pricing power and market share for another decade or two. The evidence points to several forms of this advantage. Companies like The Estee Lauder Companies, Caterpillar, and S&P Global operate in industries with high barriers to entry. Estee Lauder's strength lies in its portfolio of premium beauty brands, which create customer loyalty and switching costs. Caterpillar's moat is built on its global distribution network, brand recognition, and the high cost of entry for new players in heavy equipment. S&P Global's moat is its vast data and analytics infrastructure, which creates immense network effects and regulatory complexity for competitors. These are the types of advantages that, when combined with a sound balance sheet, can weather economic cycles and protect profitability.

The margin of safety is where the index's methodology becomes most powerful. It forces a quantitative check on the qualitative assessment of the moat. The most striking example is Constellation Brands, which was trading 41% below its fair value estimate as of September 2025. That is a substantial discount. It suggests the market is pricing in a significant risk or overlooking the company's wide-moat characteristics, which include a portfolio of premium beverage brands. This gap is the core of the value opportunity. It provides a buffer against error in our moat assessment and against unforeseen downturns. The index's semiannual reconstitution ensures this discount is not a permanent feature but a recurring signal of market inefficiency.

The ultimate test, however, is the business's ability to compound earnings. A wide moat and a discount are necessary but not sufficient. The company must be able to reinvest capital at high rates of return over the long term. This is where the focus shifts from the current valuation multiple to the quality of the business model. A company with a durable moat can sustain superior returns on capital, which fuels growth without dilution. This compounding engine is what drives intrinsic value higher over time. The Morningstar methodology implicitly values this quality by rating the moat in the first place. For investors, the task is to ensure the company's strategy-like Estee Lauder's "Beauty Reimagined" transformation or Adobe's recurring software model-aligns with its moat to protect and grow that compounding engine.

The bottom line is that the Morningstar Wide Moat Focus Index offers a disciplined path. It starts with a quality filter, applies a price discipline, and implicitly rewards businesses with the durable competitive advantages needed to compound value. For the patient investor, the work is to verify that the moat is real and wide, that the margin of safety is meaningful, and that the business model is set up for long-term compounding. When all three elements align, the investment case becomes compelling.

Catalysts, Risks, and What to Watch

The setup for value stocks in 2026 is defined by a clear catalyst and a persistent risk. The catalyst is the market's likely rotation out of overvalued growth. For years, the equity market has been a casino where simply "putting chips on the table" worked, driven by mega-cap tech and the Magnificent Seven. That era is ending. With the S&P 500 trading at a price/earnings ratio of 31, a level reached only a few other times in history, and with the top 10 positions accounting for roughly 40% of the index, the concentration is extreme. History suggests that outperformance like that from a single sector doesn't last forever. As the economic winds shift, a rotation out of growth and into value might finally be in store. The start of a new year is a natural time to revisit portfolios, and the path to outperformance for value stocks may not require a bear market, but simply a growth slowdown.

A powerful, forward-looking force could amplify this rotation: artificial intelligence. AI's impact on corporate costs is a potential game-changer. If AI can reduce labor's share of expenses by even 5%, it could significantly boost profitability for many wide-moat firms. This efficiency gain would directly enhance earnings power, a key driver of intrinsic value. For companies with durable competitive advantages, this technological lever could widen their moats and accelerate the compounding of earnings, making them even more attractive relative to their current prices.

Yet, the risks are material and must be weighed. The primary risk is the sustainability of earnings growth. The value thesis assumes these wide-moat businesses can continue to compound profits. Any stumble in their growth trajectory would challenge the investment case. A second, more immediate risk is further valuation compression. While the market may rotate into value, the process could be volatile. If economic growth slows more sharply than expected, or if inflation reasserts itself, the entire market could face pressure, compressing valuations across the board, including those of high-quality stocks.

Finally, macroeconomic shifts pose a direct threat to consumer and healthcare spending. The evidence points to a labor market where efficiency initiatives are driving job cuts, and where healthcare has done almost all the heavy lifting for job creation. This suggests underlying economic slack is building. A slowdown in consumer confidence or a shift in healthcare spending could pressure the earnings of the very companies we are targeting. The high P/E ratio of 31 and the extreme concentration in mega-cap tech are the underlying pressures that make this rotation a plausible catalyst, but they also mean the market's tolerance for disappointment is low. For the patient investor, the watchlist must include signs of a growth slowdown, the pace of AI cost integration, and any shift in the labor market or consumer sentiment that could threaten the earnings growth underpinning these value opportunities.