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How to Find the Best Stocks for Long Term Investments
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When you are looking for a long term pick, you want a stock that is in a great competitive position, and one that looks to see these advantages hold over years, if not decades. But how do you find a company that is going to stand the test of time?
One way to find these companies is by looking at those with ‘wide moats’. This concept seeks companies that have a long term, durable competitive advantage that can protect a firm’s position over the coming years. Think of a castle with a wide moat surrounding it. The wider the moat, the tougher it will be to break into the castle, and that is exactly what this approach is looking for in the corporate world too.
Where Are These Companies?
To find these companies, I spoke with Brandon Rakszawski of VanEck for some insights. Brandon is the product manager at VanEck, an ETF provider that has the VanEck Vectors Morningstar Wide Moat ETF (MOAT - Free Report) and the VanEck Vectors Morningstar International Moat ETF (MOTI - Free Report) in its lineup, so he is definitely familiar with the concept.
We discuss the idea of wide moats in a bit more detail, and we also talk about the index construction of these products which focus on wide moat ratings from Morningstar, in addition to trading at big discounts to fair value.
We also talk about some of the major types of wide moats out there and how these can help give companies durable competitive advantages over time. These include intangible assets (such as brands), switching costs (the pain involved in going to a different provider), the Network Effect (how many users can make things better for the user or more efficient, keeping people on a given platform), cost advantage (who doesn’t want a cheaper product or service?) and efficient scale (fund companies are great illustrations of this, as costs don’t scale up at a one-to-one ratio with revenues as assets increase).
I also asked Brandon for a few examples of how this in terms of the funds’ holdings, and he noted how Tiffany & Co with its excellent brand name is a great case, as well as Mastercard (MA - Free Report) with its incredible network. Additionally, investors should note a few other great examples from the current holdings list, including Amazon (AMZN - Free Report) which is well-known for its ultra-low cost model, as well as Grupo Aeroportuario Centro Norte, which is a Mexican company that owns more than a dozen airports, giving it basically a monopoly over air travel in many areas of that country.
We also discuss how this approach might result in some sector biases, and some key factors that investors need to know about this approach. I also talk to Brandon about some of the companies out there that have no moat at all—and thus little to no competitive advantage—and what investors can take away from their position as well.
Bottom Line
This was a great chat on what makes a ‘wide moat’ company, and it could give investors something to look for in terms of 2017 picks too. So, make sure to listen to this edition of the Dutram Report for a closer look at this often-overlooked, but potentially lucrative, segment of the equity world. And for more news and insights into the world of ETFs, make sure to be on the lookout for the next edition of the Dutram Report, and check out the many other great Zacks podcasts as well!
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How to Find the Best Stocks for Long Term Investments
When you are looking for a long term pick, you want a stock that is in a great competitive position, and one that looks to see these advantages hold over years, if not decades. But how do you find a company that is going to stand the test of time?
One way to find these companies is by looking at those with ‘wide moats’. This concept seeks companies that have a long term, durable competitive advantage that can protect a firm’s position over the coming years. Think of a castle with a wide moat surrounding it. The wider the moat, the tougher it will be to break into the castle, and that is exactly what this approach is looking for in the corporate world too.
Where Are These Companies?
To find these companies, I spoke with Brandon Rakszawski of VanEck for some insights. Brandon is the product manager at VanEck, an ETF provider that has the VanEck Vectors Morningstar Wide Moat ETF (MOAT - Free Report) and the VanEck Vectors Morningstar International Moat ETF (MOTI - Free Report) in its lineup, so he is definitely familiar with the concept.
We discuss the idea of wide moats in a bit more detail, and we also talk about the index construction of these products which focus on wide moat ratings from Morningstar, in addition to trading at big discounts to fair value.
We also talk about some of the major types of wide moats out there and how these can help give companies durable competitive advantages over time. These include intangible assets (such as brands), switching costs (the pain involved in going to a different provider), the Network Effect (how many users can make things better for the user or more efficient, keeping people on a given platform), cost advantage (who doesn’t want a cheaper product or service?) and efficient scale (fund companies are great illustrations of this, as costs don’t scale up at a one-to-one ratio with revenues as assets increase).
I also asked Brandon for a few examples of how this in terms of the funds’ holdings, and he noted how Tiffany & Co with its excellent brand name is a great case, as well as Mastercard (MA - Free Report) with its incredible network. Additionally, investors should note a few other great examples from the current holdings list, including Amazon (AMZN - Free Report) which is well-known for its ultra-low cost model, as well as Grupo Aeroportuario Centro Norte, which is a Mexican company that owns more than a dozen airports, giving it basically a monopoly over air travel in many areas of that country.
We also discuss how this approach might result in some sector biases, and some key factors that investors need to know about this approach. I also talk to Brandon about some of the companies out there that have no moat at all—and thus little to no competitive advantage—and what investors can take away from their position as well.
Bottom Line
This was a great chat on what makes a ‘wide moat’ company, and it could give investors something to look for in terms of 2017 picks too. So, make sure to listen to this edition of the Dutram Report for a closer look at this often-overlooked, but potentially lucrative, segment of the equity world. And for more news and insights into the world of ETFs, make sure to be on the lookout for the next edition of the Dutram Report, and check out the many other great Zacks podcasts as well!
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>