The best European companies to own right now

What characterizes the best European companies?

These companies often surprise positively. That’s because their management recognizes opportunities and exploits possibilities that we, as individual investors, might not think of. This increases the intrinsic value of the company over the years.

One of the keys to long-term investing success is buying companies that stay ahead of the competition. Legendary investor Warren Buffett originally coined the term “economic moat” to describe a company’s ability to keep competitors at bay over the long term. Morningstar builds on this idea by ranking companies based on their moat, or the strength and sustainability of their competitive advantage.

We’ve compiled a list of European companies covered by our analysts that have created wide moats between themselves and their industry competitors.—and which we expect to generate attractive returns over the next 20 years that exceed their expenses. In other words, these companies will be able to generate returns for investors over a long period of time, even while investing in their growth.

A company’s longevity and competitive advantage are inextricably linked to sustainability. Therefore, our analysis also considers environmental, social and governance (ESG) factors. The best companies have business models that allow them to effectively engage with evolving ESG issues that could significantly impact their business. Cutting costs or taking excessive risks may work in the short term, but these tactics will not provide lasting success for a company.

The companies on our list also have predictable cash flows (the amount of money coming in and out of a company), which allows our analysts to estimate companies’ intrinsic values ​​with relative accuracy. These companies also make smart decisions about how they manage and invest their money.

We’re not telling you to immediately buy stock in every company on this list. Even the best company can be a bad investment if you pay too much for your share of the company. The share prices of many companies on this list overestimate their true value, so now may not be the right time to buy. However, we think these companies are worth a look for any equity investor—and we will help you follow this watch list.

Every quarter, we dig through our watchlist for the most undervalued companies and present you with “10 undervalued stocks from top European companies”. We have grouped the companies on this list according to the sectors in which they operate:

The industrial sector is the most strongly represented with 24 companies. But consumer staples and healthcare are also well represented with 11 and 10 companies respectively. By far the largest number of companies are based in the United Kingdom (16), followed by France (13) and Switzerland (10). Only seven companies from Germany made our list.

The best basic materials stocks to consider

Commodity companies are companies involved in the extraction and production of raw materials that are important to industries such as manufacturing or construction. The performance of these companies is usually closely linked to the business cycle, as demand for raw materials generally increases when the economy is growing.

The best consumer cyclical stocks to consider

Companies in this sector produce goods and services that are considered non-essential, meaning they benefit when consumers have extra income to spend. These include companies in industries such as automotive, retail, leisure and hospitality. The performance of these companies is closely related to the business cycle, as their products and services tend to be in greater demand when the economy is strong. For example, you’ll find two luxury French brands on our list.

The best financial services stocks to consider

The financial services sector includes banks, asset managers, financial research and data companies, credit services, investment brokerage firms, stock exchanges and insurance companies. Just as the services they provide differ, the companies below fend off competition in distinct ways. The most common feature among them is that their customers face relatively high obstacles when they want to switch service providers.

Many companies in this sector are economically sensitive, with interest rates, stock market levels and the financial health of consumers and businesses affecting results.

Best consumer protection actions to consider

Companies in this sector provide services that consumers always need, so changes in the economy, such as recessions, generally do not have much of an impact on the sector. This is where the “defensive” of the consumer defensive comes in: the sector is unaffected by the ups and downs of the economy. Many of the companies below have strengthened their positions by developing a strong relationship with buyers and offering either lower prices than their competitors or a strong brand identity that justifies higher prices.

The best health actions to consider

Healthcare is another sector generally considered uncorrelated with the performance of the overall economy. The healthcare sector includes companies in the fields of biotechnology, diagnostics and research, pharmaceutical manufacturing and health information services.

The best industrial stocks to consider

This sector comprises companies that manufacture machinery, hand tools and industrial products. It also includes aerospace, defense and transportation companies. More companies from the industrial sector made our list than from any other group.

The best tech and communications stocks to consider

Companies in the technology sector are involved in the design, development and support of computer operating systems and applications. This sector also includes companies that produce computer equipment, data storage products, networking products and semiconductors. Two European technology companies made our list.

The best European property companies: Methodology

The companies on this list are covered by equity analysts at Morningstar Research Services and are based in Europe. Within this coverage list, the best companies meet the following criteria:

Wide economic moat

The Morningstar Moat economic rating summarizes the duration of a company’s competitive advantages. An economic moat is really a structural feature that allows a firm to generate excess profits over a long period of time. If Morningstar Research Services believes that excess returns will persist for 20 years or more, that company earns a wide economic moat.

Standard or exemplary capital allocation

The equity capital allocation rating is an assessment of the quality of capital allocation by management, with particular emphasis on the firm’s balance sheet, investments and shareholder distributions. Capital allocation is evaluated from the perspective of equity shareholders, taking into account the companies’ investment strategy and valuation, balance sheet management, and dividend and share buyback policies on a prospective basis. A company can receive an exemplary, standard or weak capital allocation rating.

Low or medium fair value uncertainty

The fair value uncertainty rating represents the predictability of a company’s future cash flows and therefore the level of certainty in estimating that company’s fair value. The uncertainty rating for a company can be low, medium, high, very high or extreme. It captures a range of likely potential intrinsic values ​​for a company based on the characteristics of the business underlying the stock, including things like operating and financial leverage, sensitivity of sales to the economy, product focus and other factors. The more predictable the cash flows, the smaller the range of potential intrinsic values, the lower the uncertainty.

Exchange rates from September 24, 2024:

This article has been adapted for the European market and is based on The Best Companies to Own: 2024 Edition, which Margaret Giles compiled for US investors.

The author does not own shares in the securities mentioned in this article. Learn more about Morningstar’s editorial policy.