DAVID LOH/Reuters
What are we looking for?
Moats – in the economic, not the watery, sense.
Few things are as important to a company as the ability to keep competitors at bay. Companies that have wide economic moats are able to consistently generate profits despite rivals' best efforts to plunder their opportunities.
For that reason, Warren Buffett is fond of taking stakes in companies with wide moats and holding them for a long time. He and other investors like the steady, dependable earnings these enterprises tend to produce.
How we did it
Craig McGee, senior consultant at CPMS Morningstar Canada, scoured the CPMS U.S. database for stocks that have what Morningstar defines as a wide economic moat – a sustainable competitive advantage such as patents and copyrights, huge market share, the ability to produce a product or service at the lowest cost, or high costs for a customer to switch to a rival's offering.
He ranked these stocks looking for the best combination of expected price change (using analysts' consensus 12-month target price), revisions over the past three months in consensus earnings estimates for the current year, and percentage change in the latest quarter's earnings per share compared with the same quarter from the prior year.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its investment research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.
What we found
A number of companies that share few similarities other than their moats. LinkedIn Corp., the high-tech haven for job seekers, makes the grade; so does Mr. Buffett's Berkshire Hathaway, a collection of low tech but strongly profitable businesses ranging from insurance to rail freight.
The accompanying list should provide moat-seeking investors with ample inspiration.
Remember, though, that nothing is eternal. You should always do your own research to ensure that a shift in technology or market position doesn't threaten a company's competitive advantage.
Ian McGugan