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What is Economic Moat ? and How is it beneficial to invest in Moat Stocks?

“In business, I look for economic castles protected by un breach-able moats.”

- Warren Buffett

What is an Economic  MOAT?

An economic MOAT represents some unique competitive advantage that a company enjoys which helps them to sustain growth, profit margins and market share for a longer period of time. While investing, smart investors consider a wide economic moat. Normally, a company with a wide economic moat gets a better quotation in the stock market. It would always try to be ahead of the curve. The moat can be because of multiple reasons like brand value, business monopoly, Intangible assets like regulations, technology etc.

If you live in a castle, the best way to stay safe is to dig a wide moat

The same happens in the case of business, strong fortifications help a company defend against encroaching competitors. The well built they are, the safer the company and its shareholders. That’s why investors should keep their money in ‘economic castles protected by un breach-able moats’.

6 Traits of wide MOAT stock:

1) Low-Cost Provider - A company can produce goods and services at price less than its competitors, this way they can cut competition while maintaining higher margins.  

2) Network Effect - When a company’s customer base rises, it’s service becomes attractive to other potential customers also.

3) Switching Cost- Customers would always want the least hustle in switching their choices. Companies with a wide economic MOAT would always have less switching cost 

4) Brand name Recognition - Brands convey quality and are recognisable around the globe. For eg - there is one Nike, one Audi.

5) High Barrier To Entry - There are two ways to ensure a barrier to entry - one is through money and the other one through technical expertise. Companies with high economic MOAT generally forbid entry through both the ways.

For example, the telecommunication sector has an entry barrier because of the huge initial set-up cost. 

6) Intangible Assets - Economic MOAT cannot be easily classified. MOAT stocks generally have patent and intellectual rights. They have a goodwill in the market. A pharmaceutical company has an advantage over its competitors due to patented drugs, which will act as a moat. No other pharmaceutical company can produce that patented drug.

A wide economic moat has been observed in the following 25 stocks in the Indian market

1)Pidilite-Adhesive manufacturing companies like Fevicol, Fevi kwik, Dr. Fixit etc.

2)Asian Paints-Having highest share of 38.87% in Indian Paint Industry.

3)GMM Pfaudler - GMM Pfaudler is a well established and financially stable company. With a market share of more than 50% in Glass Lined equipment, GMM Pfaudler is the market leader in India.

4)IRCTC - One and only online platform to book train tickets all over India.

5)Bajaj Finance - It deals in consumer finance, SME, commercial lending and wealth management 

6)Page Ind - Also known as Jockey India, one of the biggest manufacturers of Innerwears in India.

7)InfoEdge - It is one of the very few profitable online classifieds companies. For example-,

8)HUL- Consumer goods like giant brands like Surf excel, Lux, Sunsilk etc.

9)Abbott- It is one of the fastest growing pharmaceutical companies.

10)Nestle- Its Famous for Maggi, Chocolates etc.

11)Atul- It deals with Integrated Chemical Components.

12)Dmart- It is one stop super market chain which includes food, toiletries, beauty products, garments etc. 13)Titan- Leader in jewellery and watches. 14)Jubilant Foods- Largest food services company. It holds the master franchise rights for two international brands -  Domino’s Pizza and Dunkin Donuts. 15)3M India- The company manages its operations in business segments like industrial , healthcare, energy, consumer, safety and graphics. 16)Honeywell Automation India Limited (HAIL)- It provides integrated automation and software solutions including process solutions and building solutions. 17)HDFC- HDFC is a leading provider of Housing Finance in India. With our customised solutions we have fulfilled over 7 million dreams since inception.

18)Gillette- It is a brand of safety razors and other personal care products like shaving supplies owned by Procter & Gamble.

19)Colgate- The Company is engaged in manufacturing and selling of branded packaged fast moving consumer goods in the oral care businesses. 

20)Reliance Industries Limited- It is engaged in energy, petrochemicals, textiles, natural resources, retail and telecommunications.

21)Marico- It is associated with consumer products and offers brands like Parachute, Haircode, X-Men, Black Chic etc 

22)Dabur- It is one of the India's largest Ayurvedic medicine and natural consumer products manufacturers.

23)Castrol- Largest manufacturer of automotive and industrial lubricants in the Indian lubricant market.

24)Bosch- Bosch is a leading supplier of technology and services in the areas of Mobility Solutions, Industrial Technology, Consumer Goods, and Energy and Building Technology.

25)Wabco- It supplies technology and services to improve connectivity, efficiency and safety of commercial vehicles in India.  How to buy stocks with Moat? Like blue chips stock, moat stocks also often trade at overvalued price levels. Hence it is essential to take care while buying these stocks. 

  • Prepare the list of moat stocks.

  • Start tracking the price of moat listed stocks.     

  • Once the price falls below its fair price, go for it.                                                                                       

The logic behind is no matter how good the stock (blue chip or wide moat), if it is not bought at a fair price returns will be small (or even negative). Conclusion- A company with so many benefits or a wide moat is definitely a company that is worth investing in and will create a lot of value for the shareholder. It will generally remain profitable even during volatile times. It would also act as a cushion and will be way ahead of the competition if any. As an investor, analyse a company from the characteristics mentioned above to identify economic moat and do exhaustive research. Remember, invest only in companies and sectors you know and understand.

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