Stock market strategies

Morningstar: The Verdict on Wide-Moat Stocks

Value investing has a number of tenants. One of the more popular items that value investors look for is a durable competitive advantage over peers. This term has been popularized as a “moat.”

A moat can come in a number of ways. A strong brand can offer a moat, as consumers will be willing to pay a slightly higher price compared to a non-brand name. Or a company may have a legal or cost advantage.

For investors, moats tend to offer a slight edge that can lead to much higher returns over time as returns compound.

However, investors need to be aware of a number of potential shortcomings. For instance, a moat is not a guarantee. Changing market conditions could mean that a moat is lost over time. It may even happen quickly depending on how fast an industry changes.

While there are some potential warning signs to watch for, moats have a number of advantages for patient investors. The strongest one in volatile markets is safety. When markets start to drop, companies in financial trouble may face bankruptcy.

But for a strong company with a wide moat, such as Microsoft (MSFT), a market correction can offer long-term investors a solid entry point.

Using wide moats to focus on safety looks like one way to take advantage of the latest market selloff for future profits ahead.

For the full read on the power of wide-moat stocks via Morningstar, click here.