Berkshire Hathaway (BRK-B) chairman Warren Buffett has long extolled his love for companies with fortress-like competitive advantages. As he explained in his 1995 shareholder letter: “In business, I look for economic castles protected by unbreachable ‘moats.’ ” That particular reference was directed at GEICO, a wholly owned subsidiary of Berkshire Hathaway.
Buffett has often explained that the job of the folks running Berkshire’s subsidiaries is “moat-widening.” So not surprisingly, Berkshire Hathaway’s investment portfolio is full of moat standouts. From the 2007 shareholder letter: “A truly great business must have an enduring 'moat' that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business 'castle' that is earning high returns." Buffett goes on to extol moats created by a company being the low cost producer, such as GEICO and Costco (COST), those possessing a powerful world-wide brand like Coca-Cola (KO), Gillette, since bought by Procter & Gamble (PG) and American Express (AXP).
Taking a cue from Buffett (who got schooled by Ben Graham on the topic) the value-focused equity analysts at Morningstar (MORN) developed their own proprietary system for assessing the moat-iness of companies they cover. Since 2002 the firm (which, in the interests of full disclosure, is an investor in YCharts) has run an in-house Wide Moat Focus index. Only 10% or so of Morningstar’s universe of stocks earn the Wide Moat tag, and the index holds the 20 Wide Moaters that Morningstar deems to be the cheapest. That’s based on another proprietary tool: Morningstar’s Price-to-Fair Value assessment. The index is rebalanced each quarter.
Since the index’s inception it has an annualized return of more than 14%, compared to 8.6% for the S&P 500. Over the past five years, the Morningstar Wide Moat Index earned an annualized 11.8%. That’s more than double the 5.1% annualized gain for the S&P 500.
There’s also now a way to invest in the index. Since its late April 2012 launch the Market Vectors Wide Moat ETF (MOAT) has kept pace with the market, despite having the drag of an 0.49% expense ratio. (An index doesn’t have any expenses).
Creating a watchlist of the 20 stocks in Market Vectors Wide Moat ETF turns up six that YCharts rates Attractive: Bank of New York Mellon (BK), Caterpillar (CAT), Intel (INTC), John Wiley & Sons (JW-A), Microsoft (MSFT) and Western Union (WU). And for the record, yep, Berkshire Hathaway is in the portfolio as well.
Both Caterpillar and Intel are iconic market dominators that have walked into some stiff near-term winds. They clearly haven’t had a table at this year’s early-season party for stocks.
If you think both companies are permanently impaired and in danger of ceding their wide moats to competitors, there’s cause for concern. But those are mighty big moats that have been built over decades. Maybe what you’re getting is an opportunity: to buy into a dominant global firm that is pretty darn cheap in a market that really isn’t. Both Caterpillar and Intel have trailing 12-month PE ratios and forward PEs in the vicinity of 10. That’s a 40% discount to the market average. Meanwhile, Caterpillar pays a 2.4% dividend yield and Intel has a 4.2% dividend yield.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.
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- Berkshire Hathaway
- Warren Buffett