Two Wide-Moat Stocks Trading Below Intrinsic Value: A Value Investor's Perspective

The core of value investing is simple: seek businesses with durable competitive advantages that protect economic profits over decades. These advantages, often called "economic moats," are what allow a company to earn returns on capital that exceed its cost of capital, year after year. As Morningstar defines it, wide-moat stocks are the stocks of companies that have built out competitive advantages that Morningstar expects to endure for 20 years or longer. These moats can come from scale, intangible assets like patents, or high switching costs that lock in customers.

The strategy is to buy these high-quality businesses when the market price is significantly below the estimated intrinsic value. This is where tools like the Morningstar Wide Moat Focus Index become useful. It tracks companies with wide moats that are trading at the lowest current market prices relative to Morningstar's fair value estimates. It's a systematic way to find fertile hunting grounds for long-term investors.

The broader market backdrop adds context. As of early 2026, the US stock market was trading 4% below our fair value estimate. This modest discount suggests a favorable environment for value strategies, where patient capital can acquire quality at a reasonable price. Against this backdrop, the two stocks we examine-Huntington Ingalls Industries and Constellation Brands-represent classic value opportunities. They are companies with wide moats, as defined by Morningstar, but whose current stock prices appear to understate their long-term earning power. The investor's task is to assess whether the market's skepticism is justified or if it presents a temporary mispricing.

Huntington Ingalls Industries: A Defense Moat at a Reasonable Price

Huntington Ingalls Industries represents a classic wide-moat business, built on a foundation of government contracts and high switching costs. As the largest independent military shipbuilder in the United States, it manufactures difficult-to-replicate products with long production cycles. This position grants it a durable competitive advantage, as the U.S. Navy relies on a limited number of specialized yards for its most critical vessels. The company's moat is further reinforced by its role in building and repairing nuclear-powered ships, a niche that demands specialized expertise and regulatory approvals that new entrants cannot easily replicate.

Financially, the company is positioned to weather cycles. Its balance sheet is notably strong, with a debt-to-capital ratio of 35.12%. This is a significant advantage, as it sits well below the industry average of 51.29%. A robust capital structure provides the flexibility to invest in new orders and manage the long lead times inherent in shipbuilding without overextending. The company's ability to meet its interest obligations is also clear, with a times interest earned ratio of 7.70 at the end of last quarter.

Yet the valuation question is now front and center. The stock has experienced a powerful rally, delivering 113.2% returns over the last year. More recently, it posted an 18% gain over a six-day winning streak and sits up 19.8% year-to-date. This surge, fueled by a Citigroup price target increase and recent contract wins, has compressed the apparent discount to intrinsic value. The market is clearly pricing in strong future earnings growth, with consensus projecting a 14% year-over-year increase in 2026 earnings per share.

For a value investor, the key is to determine whether the company's earnings power can justify the new, elevated valuation. The wide moat offers protection, but the margin of safety has narrowed significantly. The bottom line is that HII's wide moat and fortress balance sheet remain intact, providing a solid foundation for compounding. But the recent price action has made the investment thesis more demanding. The stock's strong run suggests much of the near-term optimism is already reflected in the share price.

Constellation Brands: A Consumer Staple with a Deep Discount

Constellation Brands offers a classic value proposition: a wide-moat consumer staple trading at a deep discount. The company's moat is built on its powerful portfolio of beer and wine brands, particularly its Mexican beer imports. As Morningstar notes, the Mexican beer portfolio has given the company a wide economic moat. This advantage stems from strong brand loyalty and pricing power, allowing Constellation to command premium positions in a competitive market. The moat is further reinforced by its scale and distribution reach, which create high switching costs for retailers and consumers alike.

The valuation gap is striking. As of September 26, 2025, Constellation was trading 41% below Morningstar's fair value estimate. This represents a substantial margin of safety, a key requirement for any value investment. The market's skepticism appears to be focused on near-term headwinds, including softer beer demand and pressures from tariffs and inflation. Yet the wide moat suggests these challenges may be cyclical rather than structural, and the deep discount implies the market is pricing in a prolonged downturn.

Capital return provides a crucial buffer. In the face of earnings softness, management has leaned on a disciplined approach to returning capital to shareholders. This includes dividends and buybacks. Such actions can support the stock price during periods of operational uncertainty, offering investors a tangible return even as the business works through temporary pressures. The company's robust cash flow generation, with approximately $9 billion in operating cash flow and $6 billion in free cash flow projected over the next few years, provides the fuel for this strategy and for investing in growth initiatives.

The bottom line is that Constellation presents a compelling case for patient capital. Its wide moat offers a durable foundation, while the 41% discount to fair value creates a significant margin of safety. The company's commitment to returning capital provides a floor for the share price. For a value investor, the question is whether the market's current pessimism overstates the durability of the moat. The deep discount suggests it may.

Valuation, Catalysts, and Key Risks

For a value investor, the final step is to synthesize the analysis into forward-looking scenarios. What catalysts could close the gap between current price and intrinsic value? What risks could widen it? The answers hinge on the durability of each company's moat and the market's patience.

For Huntington Ingalls Industries, the primary catalyst is the continuation of strong U.S. defense spending and the successful execution of its order book. The recent 6-day winning streak and 113.2% returns over the last year were triggered by a Citigroup price target increase and specific contract wins, like the SHIELD contract. The company's position as the largest independent military shipbuilder means it is a direct beneficiary of long-term government investment. If the Navy continues to award contracts for new combatants and submarines, as expected, the earnings trajectory will be supported. However, the major risk is valuation compression. After such a powerful rally, much of the near-term optimism is likely already reflected in the share price. The stock's 19.8% year-to-date gain and a valuation score of 3 out of 6 suggest the margin of safety has diminished. The market is now pricing in high growth, leaving little room for error.

Constellation Brands faces a different set of catalysts and risks. The key catalyst is stabilization in consumer spending and the successful execution of its capital return program. Management has leaned on pricing, cost savings, dividends, and buybacks to steady the story during a period of soft beer demand. With a projected $9 billion in operating cash flow over the next few years, the company has the firepower to fund these initiatives and invest in growth. If consumer sentiment improves and the company can maintain its pricing power, the wide moat should begin to drive earnings recovery. The main risk, however, is persistent earnings volatility in the beverage sector. The market's deep discount of 41% below Morningstar's fair value estimate reflects significant near-term pessimism about demand and margins. If these pressures endure longer than expected, the stock could remain range-bound despite the underlying strength of its brands.

The overarching risk for both investments is that the market's "underestimation" is justified by structural challenges the companies may not be able to overcome. The broader market context is relevant here. As of early 2026, the US stock market was trading 4% below our fair value estimate. This modest discount suggests a cautious environment, but it also means that for a value strategy to work, the chosen businesses must demonstrate a clear path to compounding. If the wide moats of HII or STZ are eroded by unforeseen regulatory shifts, technological disruption, or a prolonged economic downturn, the deep discounts could become even deeper. The value investor's patience is tested not by short-term volatility, but by the conviction that the company's durable advantages will ultimately prevail.