18:11
5 of the Best Core Stocks to Own I June 15, 2026
Morningstar, Inc.
Overview
This video explains the concept of "core stocks" – foundational investments for a diversified portfolio that should be held through various market and economic cycles. It details the key characteristics of core stocks, including wide economic moats, durable competitive advantages, low to medium uncertainty, and strong capital allocation by management. The discussion emphasizes a "buy and manage" approach, where positions are actively monitored and adjusted based on valuation and changing investment theses, rather than a passive buy-and-hold strategy. The video then presents five specific core stock examples from different sectors: Alphabet, Lowe's, Procter & Gamble, ExxonMobil, and JPMorgan Chase, highlighting the rationale behind each selection.
How was this?
Save this permanently with flashcards, quizzes, and AI chat
Chapters
- Core stocks form the stable foundation of an investment portfolio, intended to be held through all market and economic conditions.
- Key attributes include a wide economic moat, signifying long-term durable competitive advantages.
- These stocks typically have low to medium uncertainty ratings, suggesting less volatility.
- Strong management with exemplary capital allocation is a crucial characteristic.
Understanding these qualities helps investors identify resilient companies that can provide stability and long-term growth, forming the bedrock of their investment strategy.
Companies with wide economic moats, like those that dominate their markets through technology or brand strength, are good candidates for core holdings.
- While buying at a discount is ideal, it's not always feasible for core stocks.
- Avoid overvalued (1-2 star) core stocks, as they may not offer adequate risk-adjusted returns.
- For 3-star rated core stocks, consider starting with a partial position to maintain flexibility.
- This strategy allows for dollar-cost averaging if the stock price declines, enabling purchases at a lower cost.
This guidance helps investors balance the desire for quality core holdings with the need for prudent valuation, ensuring they don't overpay and can capitalize on future price drops.
If a 3-star rated core stock is slightly overvalued, buy a smaller initial stake, leaving 'dry powder' to buy more if the price falls.
- Investing is framed as a 'buy and manage' process, not a 'buy and hold indefinitely' approach.
- Every stock has an optimal price to own and a price at which it's no longer desirable.
- Daily assessment of a stock's position involves deciding whether to buy more, hold, or sell based on current valuation and investment thesis.
- Taking profits or reducing a position is advisable if the valuation becomes too high or the investment thesis deteriorates.
This active management approach encourages investors to stay engaged with their holdings, adapting to changing market conditions and company fundamentals to optimize returns and manage risk.
If a core stock's price surges significantly, making it overvalued, it's prudent to sell a portion of the position to lock in gains.
- Alphabet possesses a wide economic moat, supported by multiple moat sources beyond just efficient scale.
- The company dominates its competitive landscape and invests heavily in research and development.
- It is at the forefront of future technologies like AI (Gemini) and cloud computing (Google Cloud).
- Alphabet has an exemplary capital allocation rating, demonstrated by the success of its past investments.
Alphabet exemplifies a core stock's potential due to its technological leadership, strong competitive advantages, and management's ability to reinvest effectively in growth areas.
Google's dominance in search and its significant investments in AI platforms like Gemini showcase its durable competitive advantages.
- Lowe's has a wide economic moat, driven by cost advantages and intangible assets.
- The company is strategically expanding into the professional contractor (pro) sector for earnings acceleration.
- Long-term tailwinds include pent-up demand from low housing turnover and an aging housing stock.
- Lowe's boasts an exemplary capital allocation rating, a strong balance sheet, and a proven reinvestment strategy.
Lowe's demonstrates how a company in a traditional sector can position itself for future growth through strategic focus and sound financial management, making it a potential core holding.
Lowe's focus on the pro sector, an area where competitors like Home Depot have excelled, aims to capture a growing market segment.
- Procter & Gamble is a 'steady Eddie' in household consumables, benefiting from low uncertainty.
- Its wide economic moat is built on the strength and leverage of its well-known brands.
- The company's history illustrates the 'buy and manage' philosophy, with periods of undervaluation and overvaluation.
- Despite a recent sell-off, it appears more fairly valued, potentially offering an entry point.
Procter & Gamble highlights how strong brand equity and consistent demand for essential products can create a resilient core investment, even amidst market fluctuations.
Consumers actively seek out specific P&G brands (like Tide or Pampers) in stores, giving the company significant pricing power and leverage.
- ExxonMobil has a narrow economic moat, primarily due to the commodity nature and price volatility of the energy sector.
- It faces high uncertainty, typical for the sector, but possesses strong geographical positioning and valuable oil reserves.
- The company benefits from integration across the entire petroleum chain (upstream, downstream, chemicals, refining).
- ExxonMobil maintains an exemplary capital allocation rating by focusing on its core competencies rather than diversifying into less familiar areas.
ExxonMobil shows that even in cyclical sectors with inherent risks, a company's strategic focus, resource advantages, and disciplined capital allocation can qualify it as a core holding.
Management's decision to stick to oil and gas operations, rather than investing heavily in unproven renewable energy ventures, is cited as a key to their capital allocation success.
- JPMorgan Chase holds a wide economic moat, derived from cost advantages and customer switching costs.
- It has a medium uncertainty rating and excels across its diverse business lines, often holding #1 or #2 market share.
- The company demonstrates exemplary capital allocation, balancing dividends, buybacks, organic growth, and strategic acquisitions.
- Its strong balance sheet and consistent track record make it a standout in financial services.
JPMorgan Chase exemplifies a dominant player in its industry, showcasing how scale, market leadership, and disciplined financial management contribute to its status as a core investment candidate.
JPMorgan Chase's leading positions in various banking segments, from investment banking to consumer lending, underscore its competitive strength.
Key takeaways
- Core stocks are the stable, long-term foundation of a portfolio, designed to withstand market and economic fluctuations.
- Key characteristics of core stocks include wide economic moats, durable competitive advantages, low uncertainty, and strong management.
- A 'buy and manage' approach is recommended, involving continuous assessment of stock positions based on valuation and evolving investment theses.
- While quality is paramount, consider valuation; for slightly overvalued core stocks, initiate partial positions to allow for future additions.
- Active management means being willing to take profits or reduce exposure when a stock becomes significantly overvalued or its fundamental outlook changes.
- When a core stock's price drops into deep value territory (e.g., 4-5 stars), having 'dry powder' allows for strategic additions to the position.
- Even companies in cyclical sectors like energy can be core holdings if they possess significant competitive advantages and disciplined management, like ExxonMobil.
Key terms
Core StocksEconomic MoatCompetitive AdvantageCapital AllocationUncertainty RatingFair ValueMargin of SafetyBuy and Manage StrategyDry PowderDollar Cost Averaging
Test your understanding
- What are the primary qualities that define a core stock?
- Why is a 'buy and manage' strategy considered more effective for core stocks than a simple 'buy and hold' approach?
- How does the concept of an 'economic moat' relate to a company's suitability as a core stock?
- What steps should an investor take if a high-quality core stock is trading at a slightly elevated valuation?
- Explain how a company like ExxonMobil, despite operating in a cyclical industry, can still be considered a core stock.