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3 Stocks with Strong Moats
01/26/2015 9:00 am EST
In investing, an economic moat is a fancy term for sustainable competitive advantages that can lead to sustained high returns on invested capital, explains Marshall Hargrave, contributing editor to Daily Profit.
The three stocks below have maintained their solid returns on invested capital and should continue to dominate their respective markets in 2015.
Google has one of the best moats in the technology space. The name alone now has a loyal following; “Googling” has become synonymous with Internet searching.
While Google isn't the only search game in town, cost is a moat for Google. Search is free and Google is the market share leader so there's little benefit to consumers for using another player.
Google is also great at tapping adjacent markets. It started its move to mobile long ago with its Android mobile operating system. That enabled it to lock up market share in the mobile search market.
Google can retain its moats going forward too; it has a focus on innovation, where it continues to launch new products and services in an effort to broaden its reach. And the tech giant has the cash hoard to keep this up.
MasterCard has been one of the biggest benefactors of the shift away from cash and checks and toward card payments.
Its moat lies in its network effect, in which it has built a network that's widely accepted by merchants across the world.
Beyond just processing card payments, MasterCard has been actively growing its presence in emerging markets and tapping the exciting mobile payment market.
The other beauty to MasterCard is that it's generating a very impressive 40% plus return on invested capital and has been for a number of years.
Union Pacific (UNP)
This 150-year-old railroad has one of the best moats around. Its network of rail track can't be replicated.
What's more is that railroad operators are major players in the economic cycle. Union Pacific is benefiting from a rebound in the housing recovery and imported beer delivery, among other things.
Overall, railroad operators have vast infrastructure and network scale that adds to cost advantages. UNP has seen its margins expand nicely over the last decade and its return on invested capital has also steadily risen.
If you're a true long-term investor, one of the best things you can do is focus on companies with a moat. A wide moat greatly reduces the chance that a new technology will make your company obsolete overnight.
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