Ruth Saldanha: Here’s what’s ahead on this week’s Investing Insights. Are Nvidia, Walmart, and Home Depot stocks a buy right now? Warren Buffett likes SPY and VOO—but which is better? And what will Vanguard do in 2024? This is Investing Insights.
Welcome to Investing Insights. I’m your host, Ruth Saldanha. Let’s get started with a look at the Morningstar headlines.
Walmart’s Q4 Exceeded Expectations
Walmart’s fourth-quarter results exceeded Morningstar’s expectations. The retailer continues to benefit from high customer sales with low prices. Walmart’s comparable sales expanded 4% during the quarter, offsetting a decline in the average amount each customer spends per visit. Domestic transactions have also increased consistently. Groceries gained more market share, while general merchandise declined slightly. Walmart carried out a 3-for-1 stock split on Feb. 23. Shares started trading on a postsplit basis on Feb. 26. The split did not change Morningstar’s view of the stock. The analyst maintains that Walmart’s shares are worth $49 each and are currently overvalued.
Nvidia’s Stellar Quarter and AI Demand
Nvidia’s supercharged quarter resulted in Morningstar boosting what it thinks of the chipmaker’s stock. Morningstar lifted its fair value estimate for Nvidia to $730 per share from $480 per share, and the stock is fairly valued. The tech giant is forecasting a strong April quarter that stands to exceed Morningstar’s expectations. Leading cloud computing companies plan to boost their spending to satisfy demand for AI training and inference. It appears that virtually all this spending will fall into Nvidia’s pockets. Morningstar anticipates healthy growth for Nvidia’s data center revenue beyond 2024. Its total revenue in the January quarter was $22.1 billion, up 265% year over year. Its data center business remains most critical to investors, and data center revenue was $18.4 billion, up 409% year over year. Fiscal 2025 is looking to be a banner year for Nvidia as demand continues to exceed supply. Morningstar anticipates revenue will rise by a couple of billion dollars each quarter throughout fiscal 2025 for Nvidia as more chip supply comes online.
Home Depot Felt Macro Pressures in Q4
Home Depot’s fourth-quarter results reflect macroeconomic pressures, including a slow housing market and elevated mortgage rates. The home improvement chain’s net sales and earnings per share came in line with Morningstar’s expectations. The top-line decline was a byproduct of weaker customer transactions. Big-ticket purchases were especially slow. The firm expects housing headwinds to persist, leading to declines of 1% in both comparable sales and earnings per share. Now, Morningstar thinks that Home Depot’s persistent efforts to elevate the customer experience are strategically smart. These efforts include simplifying its online channels and building new order management for professional and contractor customers. Home Depot is poised to make meaningful strides in the underpenetrated and more complex pro market and gain share in the coming years. Morningstar maintains that Home Depot’s stock is worth $263 per share. Shares look overvalued.
Berkshire Hathaway Releases Its 13F
Earlier last month, Warren Buffett’s Berkshire Hathaway released its 13F for the fourth quarter of 2023. The report suggests that Buffett’s company did not buy many stocks last quarter, adding no new names and increasing its stake in only three companies. However, Berkshire does have two ETFs listed on the 13F. The SPDR S&P 500 ETF Trust, ticker SPY, and the Vanguard S&P 500 ETF, ticker VOO. Mo’ath Almahasneh is an associate managing research analyst at Morningstar Research Services, and he covers both funds. He prefers one over the other and is here today to explain why.
Mo’ath, thank you so much for being here today.
Mo’ath Almahasneh: Thank you so much for having me. I appreciate it.
SPY and VOO
Saldanha: So, let’s start by talking about both funds. They both track the S&P 500 index, yes? Give us some of the main features of both funds. What makes them tick?
Almahasneh: Well, both of them passively track the S&P 500 index, which is a flagship index that represents 500 of the largest US stocks. Companies in the S&P 500, to be included, they need to have positive revenue over the past four quarters, and they’re selected by an index committee. Even though the name might sound like this is a count-based index, this is actually decided and dictated by an index committee, and they decide on inclusions and deletions as well as rebalancing and reconstitution. The index relies on market-cap weighting to size the positions. That means it tilts into the winning stocks and it moves away from those losing stocks. And this allows the funds, both SPY and VOO, to track and represent the large-cap space of the US market very well. So, when technology stocks are in favor, the index tilts into technology stocks; when they’re not in favor, the index tilts away.
This can also lead to concentration when the market’s gains are narrow and few companies like the so-called “Magnificent Seven” are powering the market gains, which led to an increase in concentration in the index in 2023. By the end of 2023, in December, the top 10 holdings were about 29%, which was the highest percentage in four decades. Thirty percent were in technology stocks, and that is reminiscent of the dot-com bubble. However, this is not a fault in design but rather a reflection of the market’s current conditions. And these funds do a great job mimicking their target opportunity set, which is the US large-cap space.
People and Process Pillar Ratings
Saldanha: Walk us through the People and the Process Pillars for both these funds. They earn the same ratings. Why is that?
Almahasneh: Let’s start with the Process Pillar. Both of these funds track the same index. So, the Process rating comes from our view of the index, and the index mimics the target opportunity set very well and that allows the funds to capitalize off of their low fees to outperform their active peers on a risk-adjusted basis. That means that they basically capture the same stocks as their peers, but they just charge a little bit less, and that fee difference compounds over time into a meaningful outperformance on a risk-adjusted basis. The strategy is well diversified. It provides exposure to the largest and most established US companies; that enhances the diversification as well as the quality of the portfolio. So, when the market is up, the portfolio is up; when the market is down, the portfolio is down, but you’re holding the best and the brightest of all the US companies. And that informs our High Process rating for both of these funds. And that stems from their topnotch index that they track.
On the People Pillar side, both Vanguard and State Street Global Advisors, who are basically responsible for the management of both of these funds, they have technology personnel as well as resources to closely track the index and deliver low tracking error. And we view that very highly. And they also have a long history and an expansive lineup of index products that have been very successful, a testament to their Above Average People rating that we give them. And those are the main reasons why the Process and People Pillar ratings are the same.
Why Does Vanguard Have a Better Rating?
Saldanha: Vanguard gets an edge because it has a slightly better Parent rating than State Street. Why is that?
Almahasneh: Both State Street and Vanguard share the same low-cost approach to product development. They have excellent management and investment professional teams. However, Vanguard’s mutual ownership model and direct-to-investor approach, they stand out among peers. And mutual ownership direct-to-investor approach as well as Vanguard’s advice system has been the core reason for Vanguard’s immense growth over the past decade. It grew assets at around 5% per year, which has been a phenomenal run for Vanguard’s business. And therefore, these few marginal differences are the reasons why Vanguard stands above State Street when it comes to the Parent rating. However, you will not go wrong with any of those choices. It’s just marginal differences that might make a difference in the long run, but if you’re just a passive investor looking for a quick option, both options make sense.
Saldanha: However, just one of them earns the coveted Gold rating. Tell us which one and why.
Almahasneh: The main reason comes down to—and I cover a lot of passive index funds—a lot of the differences in ratings, they come down to the difference in fees. VOO charges 3 basis points, while SPY charges 9 basis points. Both are very low cost compared to the average ETF in the US market. Both are great options, well diversified, are run by amazing teams. However, fees do matter, and you get what you don’t pay for in the financial industry. So, that is the reason why we give VOO a Gold rating, while SPY a Silver rating. Over the long run, they do compound—those fee differences—and investors have been putting a lot more money into VOO versus SPY. That is the reason why we view VOO slightly better than SPY. And that is just the basic approach, which is the lower the investor can pay, the better the investment is.
Structural Differences Between SPY and VOO
Saldanha: Mo’ath, the last thing I want to ask you is that there are some structural differences between the two funds, aren’t there? Tell us a little bit more about that.
Almahasneh: SPY was launched as a unit investment trust and that prohibits its managers from engaging in basic operations that other ETFs are allowed to do that provide marginal differences to investors and that can reduce the impact of a fund’s fee. For example, managers of SPY cannot reinvest dividends, they cannot use derivatives to equitize cash, and they’re also prohibited from engaging in securities lending, which provide additional income to offset expenses that over the long run can help investors a little bit. However, these differences do not inform our rating, but these are important structural differences that we should point out to investors.
Saldanha: Great, thank you so much for being here today, Mo’ath.
Almahasneh: Thank you.
Saldanha: Let’s stick with talking about Vanguard some more. Value investing has been paying off for the past couple of years, especially for Vanguard and BlackRock, the two 800-pound gorillas in the room. In fact, Vanguard’s index funds and ETFs (including VOO, which we just discussed) are popular choices with investors, thanks in part to their low costs and competitive long-term performances. How did the firm do last year, and what will it do this year? That’s what Morningstar Inc.’s Susan Dziubinski asked Dan Sotiroff, a senior manager research analyst with Morningstar Research Services. Here’s what he had to say.
Susan Dziubinski: Let’s talk a little bit about new fund launches for Vanguard in 2024. What might be in the hopper? Where might you see them? Again, complete speculation, but where do you think they might go next?
Daniel Sotiroff: It remains to be seen. It’s always a little bit of speculation, but I think fixed income is a big area. I think we touched on that before. That’s been a big area for the industry. It’s an area that I think has been overlooked in a lot of ways. There might be more value to be added there than there has been in the equity strategies. When we talked to Vanguard earlier this year, they said ETFs are definitely in the plans for their new fixed-income products, as we saw with the recent launches that are still pending. Along those lines, they did announce plans to launch an intermediate municipal-bond ETF. That’s going to be an index-tracking one. Then along the same lines, a California taxes and municipal-bond ETF. So, those are in the hopper for next year. So, clearly, they’re thinking along the fixed-income lines. We’ll see what comes out in terms of actively managed versus index-tracking. Both can be great offerings, I think, at the end of the day; Vanguard does both of them in a low-fee, broadly diversified format. So, that’s what I’m really watching for in terms of product launches.
Vanguard’s 2024 International Business Outlook
Dziubinski: Let’s talk a little bit about Vanguard’s international business. Vanguard hasn’t really been nearly as successful outside of the US as it’s been here. Is there anything you’re going to be looking for on this front in 2024?
Sotiroff: Yeah, to put some context around that, they’re still managing hundreds of billions of dollars. It’s a massive business. And a lot of asset managers would love to have that asset base. But you’re right, compared to their US business, it’s tiny in comparison. The things we’re really watching for are more from a business perspective. They’ve gotten into a few initiatives over the last couple of years, and they’ve backed out. This year, they left a German platform that they had created, called Vanguard Invest. That was really aimed at the DIY retail investor, led with index funds. So, it was largely an index-fund-type platform, I believe. They launched that in February 2022 and then got out this year. So, it was a very short-lived project. Similarly, they entered China a few years ago, and then they exited China, I think late last year, and then they finally got out fully this year. They had a joint venture with the Ant Group that they ended. So, it raises some questions about how committed are they to some of these markets, I think, on one end. At the same time, maybe they saw something that wasn’t working very well there and decided, hey, we’re just going to get out and not throw bad money after good type of thing.
I’m not privy to all the details that Tim Buckley and company are talking about in the boardroom, but that’s something we’re definitely going to be watching on is how do those international projects go and what do they stick with and what do they leave by the wayside. That’s probably the biggest thing we’re watching is just how do they go about looking at new markets and new strategies.
Advice in 2024
Dziubinski: Lastly, Vanguard has made a significant push into advice here in the United States. Tell us about what the firm has done already and where you think things might be headed in 2024.
Sotiroff: The way I would frame it is they’ve got great funds. No surprise, they’ve had great funds for a really long time. And they have a great platform. They have this tiered investment platform, Digital Advisor, a $3,000 minimum, 0.15% annual fee, $50,000 minimum goes up to Personal Advisor. So, then you get a little bit more hands-on financial planning advice. The fee goes up to 0.30% per year for that. Then you go to Personal Advisor Select, which is the next tier up, and that’s if you have like a $0.5 million portfolio. Then you’re getting access to more-holistic financial planning, hands-on type, actual human-in-the-loop type stuff to help you out. So, they have a great platform and everything. The underlying investments are great. I’ll reference Amy Arnott’s research in her robo-advisor report that came out earlier this year. The Digital Advisor platform came out as one of the best-in-class robo-advisors out there. So, that’s all great.
When we talked to Vanguard, they even admitted that really, it’s been the client experience side of things. It’s adding that personal touch to things and developing trust with clients and that sort of thing. That’s a real challenge, I think, especially when you’re trying to do financial planning on a large scale like this. At the same time, that’s a massive opportunity. If they can figure that out, and they’ve got this great fund base, the sky is the limit for them. It could really be the next big thing for them, I think, if they can figure it out. They’re going through some growing pains. There’s been some complaints out there from some clients that it isn’t working as well. But they’re clearly attentive to that. They realize it’s going on. They’re making some changes on the fly to adapt to it as they go. So, it’s going to be very interesting to see where that goes. I’m excited to see what they come up with because they’ve got a pretty compelling offering so far if they can figure out those little things around the edges to make it that much better.
Saldanha: Thanks, Susan and Daniel! Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer, Jake VanKersen, and thank you for watching Investing Insights. I’m Ruth Saldanha, editorial manager at Morningstar Research Inc.
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