Initially, a moat is a deep trench around a castle to protect it from invasion and enemies. Nowadays, there are 5 sources of economic moats for companies. They refer to the factors that help a company survive and thrive. Today, we’ll explain these sources and give examples of stocks to buy for each.
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You’ll Learn
- Moat companies are businesses that show solid competitive advantages or some barriers for competitors to enter their niche. There are narrow and wide-moat companies.
- The first source of moat discussed is switching costs. Switching costs can be financial, procedural, or relational. Automatic Data Processing (ADP), Microsoft (MSFT), Apple (AAPL), and Air Products and Chemicals (APD) are good examples.
- Intangible assets moat regroup intellectual property, brand equity, customer relationships, and proprietary technology. Starbucks (SBUX), Nike (NKE), and McDonalds (MCD) fit well in this category.
- The network effect relates to companies with products or services that everybody uses. There are one-sided, two-sided, and complementary network effects that make Visa (V) and Mastercard (MA) good candidates.
- The cost advantage moat allows businesses to crush competition with low prices or benefit from a more significant profit. Costco (COST), Canadian Natural Resources (CNQ), and Canadian National Railway (CNR) represent great opportunities.
- Efficient scale benefits companies operating in a market that only supports one or a few competitors. Canadian banks ((RY), (NA.TO), (TD), (BMO), (BNS), (CMI)), Telus (TU), and Canadian National Railway (CNR) could be worth adding to your portfolio.
- How can investors assess the sustainability of these moats?
- To what extent should investors follow moaty companies? Is it a “nice-to-have,” or should each of our holdings show at least one moat?
Related Content
Get more details about how to use economic moats in your investment thesis.
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