If a Stock Has This, it’ll Be a Mega Winner for Decades

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What the heck is a “moat?”

Wolf here: I learned about it while getting my MBA. We used a more academic name. But “moat” makes perfect sense. I’ve dealt with it throughout my career, from both sides of the “moat.” As an investor, I made money because companies had that moat; and I paid a price because I thought they did, when it was just a ditch. Today, the concept is more crucial than ever.

By Chris Mayer, Chief Investment Strategist, Bonner Private Portfolio

A truly great business must have an enduring “moat” that protects excellent returns on invested capital.

— Warren Buffett

At Blue Nile, you could buy a 1.08-carat, ideal-cut diamond with G color and VSI clarity mounted in a platinum band for about $8,948. At Tiffany, the same ring would cost you $13,900. That’s $4,952 more… just to have it in a Tiffany Blue Box.

It shows you the power of a brand. It’s Tiffany’s moat. Competitors can sell the same diamond, but they can’t put it in a Tiffany Blue Box. This fact helps drive stock returns, too.

Blue Nile’s stock is down about 24% since it went public in 2004. That’s more than a decade of no return for investors.

By contrast, Tiffany’s total return (including dividends) is up 45-fold since it began trading in 1987. That’s even after its recent beating.

Tiffany has a moat. Blue Nile does not. (The above example comes from Pat Dorsey’s The Little Book That Builds Wealth.)

So, what’s a moat?

A moat is what protects your business from its competitors. It allows you to do things your competitors can’t do—like charge $5,000 for a blue box. It’s also the engine behind some mega stock winners.

See Starbucks. When it began back in the 1970s, a cup of coffee was about 50 cents. Starbucks got people to pay a couple of dollars for their coffee by playing up the coffee’s quality. It also brought McDonald’s-like quality control to coffee to ensure a cup of Starbucks coffee tasted the same everywhere. This was a big innovation at the time. And it’s made the Starbucks’ brand the powerhouse it is today.

I remember reading about how some of the venture capitalists who looked at Starbucks early turned it down. They couldn’t imagine people paying so much for a cup of coffee… But as you know, the stock has been a monster winner, up more than 16,000% since its initial public offering (IPO) in 1992. And it’s up more than tenfold since 2008.


That’s the power of a great moat.

If you have one, your stock can overcome the most fearsome onslaughts. Look at Coca-Cola, one of the world’s greatest brands. (Warren Buffett likes to use this example.) Coca-Cola went public in 1919. Let’s say you were an investor in 1919, and a man from the future gave you a glimpse of what lay ahead. Depression. Another depression—one that would go on for so long, people would forever call it “The Great Depression.” Wars. Sugar rations. Inflation.

You probably would’ve guessed there were hard years ahead for Coke. Yet if you’d bought Coke for just $40 and reinvested the dividends, you’d have over $5 million today.

When I think of moats, I think of Pat Dorsey. He was the director of equity research at Morningstar and is currently the president of Sanibel Captiva Investment Advisers. Dorsey writes and speaks extensively on moats. He uses this analogy for why you should pay attention to moats:

It’s common sense to pay more for something that is more durable. From kitchen appliances to cars to houses, items that last longer are typically able to command higher prices… The same concept applies in the stock market.

Moats make companies durable by keeping competitors out.

I’m sure you can think of some businesses with great moats. Most people will think of companies with great brand names, like McDonald’s.

But there are many other ways to build a moat. Think about Comcast.

Comcast has miles and miles of cable that lead directly into the homes of millions of Americans. Once you get your Internet connection through Comcast, it’s a pain to switch. That’s an enormous advantage and hard for competitors to crack. And Comcast has been a big winner for a long time, outstripping the S&P 500 with ease…


So, how do you recognize a company with moat? Here are five examples:

  • You have a strong brand. Tiffany has a moat, as we saw. People pay up just to get that blue box, even though what’s in the box might cost less somewhere else. Starbucks is a great brand. It inspires loyalty and ensures recurring customers. That’s a moat.
  • It costs a lot to switch. Comcast is a good example here. Once you have your email and cable tied up with Comcast, it’s a pain to switch.

Banks can have this kind of moat too. There isn’t much of a competitive advantage that one bank can have over any other. They all have the same products. And with the Internet, branch locations aren’t important.

Yet when you look at the numbers, people tend to stay at their banks for six to seven years. That’s because it’s a pain in the neck to change banks. As economists say, “switching costs” are high. That’s a moat.

  • You enjoy network effects. Microsoft had a great networking moat for years. Everybody else used its operating system… so you wanted to too. The more people used Microsoft’s operating system, the more it enjoyed network effects.

There are lots of network moats today. Think of Facebook, Twitter, or YouTube. It’s very hard for competitors to replicate these businesses, to crack the network moat. It’s like trying to sell the first telephone.

  • You do something cheaper than everybody else. If you are the low-cost guy, like Wal-Mart, you have a moat. Wal-Mart destroyed many higher-priced retailers.

Interactive Brokers is another example. It’s prices are much lower than every other discount broker. That partly explains why it’s growing twice as fast as its competitors.

  • You are the biggest. Absolute bigness can be an advantage if it keeps competitors out. Imagine what it would take to try to replicate the research capabilities of Intel or the purchasing power of Wal-Mart.

Relative size can also be a moat. If you’re the dominant insurer of small taxi fleets, as Atlas Financial is, then you have a moat. Competitors are unlikely to invest the time and energy necessary to compete in what is a niche market.

This is not meant to be an exhaustive look at moats. There are other, subtle ways a company could create a barrier other companies have trouble breaking through.

In essence, moats are a way for companies to fight “mean reversion” (this is like a strong current in markets that pulls everything toward average).

In an unpublished study called “Mean Reversion in Corporate Returns,” Matthew Berry, a Columbia Business School alumnus and former analyst at Lane Five Capital, gives us a great clue to look for in finding moats. His study covers the 15 years from 1990 to 2004. It includes the 4,000 largest companies primarily located in the United States, the U.K., Canada, Germany, France, Italy, and Spain.

Here’s his main finding: High gross profit margins are the most important single factor of long-run performance.

This means that if a company started with a high gross profit margin, it tended to keep it. Conversely, when it started off with a low gross profit margin, it tended to stay there as well. “Gross margins persist,” to use the statistical lingo.

Gross margin is a good indication of the price people are willing to pay relative to the input costs required to provide the good. It’s a measure of value added for the customer. Not every company shows a large gross margin. But those that have it usually get it from some competitive advantage. And these advantages do not tend to disappear overnight.

So, a high gross profit margin is one more clue to a durable moat.

Here are two lesser-known stocks that meet that hurdle. They have great moats. They’ve got track records as winners. Both are on my watch list:

  1. American Tower (AMT): American Tower owns cellphone towers and leases them out to carriers. Its gross profit margin last year was an astounding 73%. It’s a great business. Once it has a tower in place, it’s tough for a competitor to justify putting up another one in the vicinity. And every “tenant” AMT adds to an existing tower is almost pure profit.
  2. Liberty Global (LBTYA): Liberty Global is the largest cable operator in Europe with 53.2 million subscribers. (Think of it as Europe’s Comcast.) It’s basically a monopoly. It has a great moat, which translates into rich profit margins. And John Malone, the celebrated 74-year-old cable wizard, controls it. You couldn’t ask for a savvier man at the helm.

Both of these stocks are likely long-term winners thanks to deep and wide moats.

Editor’s note: In Bonner Private Portfolio, Chris and his team focus on strong-moat companies that will build your wealth long term. His recommendations are so impressive, Agora Founder Bill Bonner is investing $5 million of his family trust’s money in them. To learn more about the elite system Bill trusts with his own money, click here.

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  36 comments for “If a Stock Has This, it’ll Be a Mega Winner for Decades

  1. Petunia
    May 30, 2016 at 9:30 am

    The moat around Comcast is an alligator pit. Comcast has been voted the worst company in America two years in a row. As a Comcast customer for over a decade, I can attest that the designation was well deserved. In fact, one of the best things about moving out of south Florida is that I don’t have to do business with Comcast anymore. I could go on at length on the subject.

    On the opposite end of Comcast is a company I have just recently discovered and consider it a jewel, Fresh Market supermarkets. This is the best food retailer I have come across in over a decade. I understand they are closing stores and may be in trouble, but I consider them the best in the high end food retailing space. The quality is excellent, as is the service. I make it a point to go there and bust my budget just so they won’t have to close.

    • May 30, 2016 at 10:20 am

      For years, I’ve been trying to find an alternative to Comcast broadband, but they own the only real broadband network in our neighborhood. The alternative is “twisted pair” telephone wiring installed in the 1940s, owned by AT&T. That’s a moat with alligators, as you said so eloquently.

      • Petunia
        May 30, 2016 at 10:56 am

        Since you are in SF, Google’s backyard, can’t the people of SF embarrass Google into installing Google Fiber. I would have thought this would be the first place they would install it, not the last. And they can definitely afford to buy off all the politicians.

        • May 30, 2016 at 2:20 pm

          You’d think! But you have to be in Kansas City, that’s where Google started rolling out its fiber-optic network … in the middle of the country. I live in an older SF neighborhood dominated by AT&T and Comcast. I have a 100+ year-old utility pole right out in front of my window. It’s rotting before my very eyes. The top is nearly gone.

          But the other day, someone strung a fiber-optic cable across the neighborhood, so maybe in a few years, we’ll have fiber available. But not yet…

        • May 30, 2016 at 2:35 pm

          Here is photographic evidence of our our high-tech communications system in SF, right outside our window: a utility pole that is over 100 years old (started out as telegraph and telephone pole) and now holds electrical wiring, a transformer, a bunch of Comcast cables, and AT&T “twisted pair” wiring from the 1940s. The telephone wiring is below the edge of the photo and you can’t see it.

          Note how the top has rotten off.


        • Upwising
          May 31, 2016 at 1:56 pm

          U S A !! U S A !! U S A!!!

          Undefeated *
          Saved &

          *Some overseas engagements, limited actions, undertakings, missions may have failed to reach advertised expectations and/or exceeded projected budget outlays. Failure to achieve glorious victory is no indication of defeat. Previous inventions of fact are no prediction of future truths.

      • d
        May 30, 2016 at 8:29 pm

        Exactly A moat full of alligators is still a moat, if your inside it. Which is how many Bad company’s retain customers, and stock prices.

        Iconic Brand (Harley until it destroyed, it by making components then whole bikes outside the US), Brand name, Brand dominance, Brand change Hurdles, (Brand being Moat).

        The best way to change bank’s or other hurdle Entity’s is establish somewhere else first (suck and see) Then migrate the rest into a running tested system..

        Nothing worse than changing to a new boss, who is as bad, or worse than the old one.

      • upwising
        May 31, 2016 at 2:04 pm

        WOLF :: Broadband Service is kind of like execution in Utah.

        For many years the State of Utah allowed condemned prisoners to choose the method by which they preferred to be “dispatched.” The “menu” for at least forty years was hanging by the neck, firing squad, or beheading. (Mormons can always have something to talk to Saudis about at cocktail parties.) Anyway, the beheading thing got dropped (no pun intended) before 1900. These days, they dither on the firing squad and “offer” needles (if they can scam the execution drugs). The “consumer choice experience” is important in Utah!

        Why does broadband “choice” feel like the “choice” offered the guy in the cell in Utah?

    • ML
      May 30, 2016 at 11:08 pm

      Food is an easy target for competition. Food retailers are rarely vertical retailers – they hardly ever grow the stuff themselves. Mostly it is bought in to resell.
      I am also willing to pay a higher price for the sort of food I like but I would’t invest in a food store: good businesses do not automatically make good invesments – the barriers to entry are too low.

      • Petunia
        May 31, 2016 at 9:55 am

        I just left Florida where I the food sold is substandard even in the expensive supermarkets. I was in a Whole Foods once, and never went back.

        Fresh Market really does add value to their merchandise. Their store made salads are exotic and wonderful. They have a bakery that is spectacular. I swear the French Vanilla bread is baked by angels. I just grilled the best T-bone steaks and burgers(infused with bacon and cheddar) I have eaten in years, bought at Fresh Market. I can’t afford to shop there all the time but I am going as much as I can.

  2. OutLookingIn
    May 30, 2016 at 9:51 am


    A very, very good moat.

    I was lucky (gut feeling) enough with a little due diligence in the Spring of 2007 to exit the market, mainly money market funds.
    Then the question became, where to go? Someplace safe. As economic circumstances worsened the decision became clearer. Hormel Foods. (HRL)
    No matter what the economic condition, people still have to eat. In good times its steak. In bad times its Spam. There are many copies, but there’s only one Spam. This is Hormel Foods iron clad moat.
    Still own it and have added to my position since 2008.

    • OutLookingIn
      May 30, 2016 at 10:03 am


      Hormel Foods Corp. (HRL)
      Is now oversold and a bargain.
      Since trading at $44.00 in February is now around $34.00
      This is a good entry point.

      Strictly in my personal opinion. Do your own due diligence.

      *long: HRL

    • Petunia
      May 30, 2016 at 10:11 am

      I love Spam. We always have it in the house, during good times and bad.

      • Tinky
        May 31, 2016 at 6:41 pm

        Spam and “vanilla bread”? American gourmet taste at its finest!

  3. ke
    May 30, 2016 at 10:10 am

    What i learned in man school is that the university medical complex is the ultimate moat, set up as a drug distribution and RE inflation hub, not healthcare and education. Social engineering is a polite way of saying human farming, which is what finance is all about. We destroyed Afghanistan to force people into the trade. Ignorance is the biggest threat tut o peace.

    • ke
      May 30, 2016 at 10:15 am

      Funny, after mba school, I studied Bernie.

      • JP Frogbottom
        May 30, 2016 at 11:00 am

        Well, ke, what’d you learn about, and from studying Bernie?

        As I survey the presidential ‘hopefuls’ he, and jill Stein make the most sense, but then we are a senseless nation, so….

        • ke
          May 30, 2016 at 11:34 am

          From where I sit, voting on derivatives is a waste of time. Passive investment makes the entire nation poorer, with the few gaining at the expense of the many. Debt as money ponzis collapse upon demographic deceleration. And the roosters are coming home. I vote on parents running a business to raise their children, discounting the debt accordingly, making gravity work against itself. Obama sold out his own, and that is / the nature of politics, local, with aggregated politicians leading the remainder to slaughter every time. The only reason to vote is to keep the monkeys off your back. But that’s me.

          Every time I was fortunate, I worked harder, so that’s what I look for in others. Green can’t be green without fixation of CO2 and production of O2. I just don’t care to live in a world of artificial binary choices, and have more productive things to do. Politicians lead parades.

        • OutLookingIn
          May 30, 2016 at 12:18 pm

          “we are in a senseless nation”

          Yes, but more so a lawless nation. There is a distinctive two tier system of jurisprudence. An elite financial/governmental control that ensures immunity from ANY law and a second lower level of enforcement for the remainder. The slaves.

          Make no mistake, there will be a day of reconning coming. It will not be peaceful. The uprising of the slaves will sweep all before it, both guilty and innocent. No stone will be left unturned, as the pursuit of those criminals in high places will be international in flavor.

  4. ke
    May 30, 2016 at 12:15 pm

    I have no issue with the markets. They make a great counterweight.

    I am fortunate in the ability to swing a great deal of money, and I know how hard it is to raise children and run a small business in this environment, so I really don’t care what kind of political sign is in the store window.

  5. Ptb
    May 30, 2016 at 12:23 pm

    Moats? Sounds like “barrier to entry”.

    Protecting margins is done through many means, but denying competition seems to always be a favorite among the alternatives. Especially by the gorillas. Maybe that’s why disruptive technologies have such power. Don’t try to change the system, just go around it.

  6. JimTan
    May 30, 2016 at 12:32 pm

    A moat that provides advantage to firms with superior product/service quality is a good thing. A moat that provides advantage despite product/service quality, or the idea that every product/service is an interchangeable commodity is a bad thing.

  7. chris Hauser
    May 30, 2016 at 12:34 pm

    i like ketchup. oceans of it.

  8. nhz
    May 30, 2016 at 12:35 pm

    The big moat of Starbucks and many other big US multinationals is tax evasion. Easy to crush the competition and become big if you pay less than 0.1% tax for many years (at least in Europe) while the competition pays 20-35% taxes.

    I think this type of moat will prove to be a minor ditch in the near future because the public is no longer accepting this kind of double standard for taxation. As soon as these companies are paying the same tax as everyone else (mostly smaller businesses) they will have trouble competing. Either the zero tax regime for US companies will fall, or small companies will start using the same facilities (initiatives popping up all over Europe lately); politics will have to act.

    • mike
      May 31, 2016 at 10:24 am

      Yeah, I don’t see why making a consistently good pot of coffee is a moat. Dunkin Donuts and QuickCheck can do that. Even McDonald’s is supposed to be able to do it.

      Cell phone towers are not a good moat. They may no longer be necessary with soon to come systems based on many small receivers/transmitters.

  9. John S
    May 30, 2016 at 12:37 pm

    Comcast and AT&T may have a moat at present time but new and emerging technologies such as low orbit satellites and balloons may eliminate it. Wireless transmission speeds are also increasing quickly and there is massive money and interest being poured into alternatives. These companies may be safe for next five years but they could be in trouble within a decade. Changing preferences as well as decades worth of customer resentment means the change could be quick and brutal.

    Microsoft is an example of what happens to companies with short sighted and unimaginative management. They have missed out on every single technology trend in the last 15 years and are starting to become irrelevant to consumer market. What makes it worse is they had a leg up in most cases. Sure they are not going anywhere and may actually be a good stock to hold due to locked in long term government and corporate contracts with high barriers to alternatives. They are becoming next IBM. On the other hand I am not sure what IBM’s plan is, their time has passed. Maybe they can have Watson serial win Jeopardy to provide some revenue.

    • Petunia
      May 30, 2016 at 3:56 pm

      The recent worker strike at Verizon is another nail in the coffin for land line telephony. The people working there are overpaid, for their skills, and have no idea that their industry will also be outsourced in the next few years. The arrogance of their union will kill off all their jobs and they don’t have a clue it’s coming.

      • John S
        May 30, 2016 at 8:16 pm

        I think technology could kill their jobs more quickly than the union arrogance. As another poster mentioned below and I alluded to in my comment 5G speeds may make wired internet pointless for the average household.

        Following technological trends is becoming increasingly important when making investing decisions. Upcoming trends have the potential of disrupting entire industries and making millions of jobs superfluous.

  10. Le Professor
    May 30, 2016 at 6:07 pm

    I suppose Whole Foods may be analogous to the Starbucks example, although competitors are chomping at the gates for both incumbent brands.

    Wolf nails it, Coca Cola has one of the strongest moats. Pepsi wins blind taste tests 95 times out of 100, is sweeter and citrusy, yet cannot chip away at coca cola’s brand.

    I would also imagine that becoming a category helps you entrench that moat — Google it, Xerox it, Kleenex, Post-it.

    As far as Comcast is concerned, I am not a huge fan. They refused to provide service for being over 200 feet away from the nearest hub. I am waiting for Verizon to launch 5G in 2017, 3x faster than Google Fiber and wireless!

    • Petunia
      May 30, 2016 at 8:10 pm

      I buy too much soda and my favorite is a Coca Cola product. I try to buy a lot when it’s on sale but it is definitely better, to me.

      Tiffany’s and Starbucks are basically in the same business. They sell exclusivity at different price points.

    • ML
      May 30, 2016 at 11:15 pm

      Even a brand has to remain relevant. Remember Kodak.

    • JerryBear
      June 1, 2016 at 10:58 pm

      Pepsi wins taste tests because it is sweeter and they only give you a little sip so it makes a stronger impression. But if you drink the whole glass the taste becomes cloying while coke remains brisk and refreshing so it has the advantage in these taste tests.
      The real reason Coca Cola is so distinctive is that it is the only cola beverage that is also a coca beverage. The Coca Cola company imports 200 tons of coca leaves every year to be processed into decocainized coca extract which is then used to flavor the beverage concentrate. I am rather fond of coca leaf tea (I brew it strong and drink it sweet and iced) and I easily recognize the appealing coca flavor in it. It is also brisk and not too sweet and stays refreshing glass after glass. I sometimes add a tablespoon of my own coca leaf extract to coca cola to create genuine “Coca Cola Original” say… circa 1890.

      P.S. Contrary to what you might think, coca leaf products are readily available in the U.S. (and I believe Canada)on the INTERNET. Just enter “novoandina reyes avila” into Google and check out their store.
      They offer a variety of food and beverage products made from coca leaf. They have been importing it from Bolivia and Peru for more than a decade and ship it from two warehouses located in Boston and North ?Carolina. I am not sure just how they do it. Though the government does insist that coca leaf products be sold only on the INTERNET. Trader Joe’s got in a bit of trouble recently for selling boxes of Windsor brand coca leaf tea in tea bags on their shelves and were ordered to stop carrying it. Some products also are available in limited quantities only. I can vouch for the quality of their products.
      Just for your information….

  11. hidflect
    May 30, 2016 at 6:53 pm

    Great article. It explains the idea some people have that McDonalds is a real estate company more than a fast food outlet. They always got in first and grabbed the best locations. Their moat is more than just brand recognittion; it’s their customer access positioning.

  12. ML
    May 30, 2016 at 11:18 pm

    Reminds me of the old joke: rhe French make the best lovers, but the Japanese make them smaller and cheaper

  13. Agnes
    June 1, 2016 at 12:59 am

    Except the case of comcast and “hard to switch”, the sovereign consumer determines which mean reversions do not work. Likewise Kodak fell because people wanted instant gratification. Likewise one reason we use paper money is because one must pay taxes with it(coercion) To quote Luo Ping in 2009 “We hate you guys”(buying of treasuries because of coercion).

  14. June 1, 2016 at 1:53 am

    My favorite stock is RKDA, Arcadia Biosciences, on account of their Moat. They own patents and protections for a-biotic crop yield traits. These make pretty much any crop plant (corn, cereal grains, potatoes, peppers, trees .. just angiosperms in general) more efficient users of water and nutrients. They own the IP to several traits that overall increase yields by 5 to 30%. The numbers involved are staggering.

    Their program is the only one of its kind, and they are partnered with Dow Agro, Syngenta, Monsanto through subsidiaries, even Scotts Miracle Grow for drought resistant grass. They have one trait allowed in Argentina for soybeans (Argentina and Brazil share the #2 world producer spot). They also have numerous other projects and one approved product (GLA nutritional oil as used in baby formula and cat food) already selling. Their GLA costs 1/4 as much to grow in Safflowers as the present method of extracting it from Borage Oil seeds.

    I could go on about their science, like how their NUE trait will earn Carbon Credits from the IPCC (already approved), but don’t want to sound like a shill, which I’m not. I write on Seeking Alpha as Modis, and have covered the stock in depth there.

    One thing to keep in mind about any of the stocks mentioned in the article AND comments is the effect of unfair competition by monopolies. In RKDA’s case it is Monsanto which has an active interest to derail their development. Arcadia could earn Billions of pure profit from licensing fees in less than a decade, but currently trades at a sub 100mm Market Cap. So even the best moat of proven science and broad IP protections don’t always guarantee instant success. I’ve taken quite a loss on RKDA but will continue to hold and increase my position. It’s my best bet as to which security will grow the most in the next 15 years. Every McDonalds, Kohls, Apple or Walmart started small. Anyone who won’t list honest risk factors is not to be trusted.

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