Weekend Reading – Stocks with Moats
Hey Everyone!
Welcome to a new Weekend Reading edition, about some stocks with moats.
Before that theme, few recent reads and reminders:
I highlighted some key things you need to know about when it comes to the new Tax-Free First Home Savings Account (FHSA) – now up and running in fact!
When in doubt, I think you should Keep Investing Super Simple (KISS).
And just this week, I shared why my approach to live off dividends and ETF distributions in semi-retirement is alive and well.
Weekend Reading – Stocks with Moats
Maybe just like some medieval castle, a moat serves to protect those inside this massive fortress and maintain some riches from outsiders and threats at the same time.
I’m not sure we can put an origin around this term but most would say the modern-investing term economic moat was popularized by the one and only Mr. Warren Buffett.
As part of Buffett’s investing approach, he liked (and still likes!) finding and owning undervalued stocks based on certain fundamentals, including those with a competitive advantage.
How might you find a company with an economic moat?
A few things come to mind in your search:
1. Production advantages – a company achieves production advantages when it is able to provide a product or a service at a lower cost than that of its competitors.
2. Consumer advantages – said company achieves consumer advantages when it is able to provide a greater benefit to consumers than its competitors do. Maybe there is a “network effect”, in that more customers use a product or service over time. There is however a “cap” of users for a specific product or service eventually consider. See Netflix! 🙂
3. Brand value – here, a company is able to generate more revenue or charge a premium price for products or services because of brand recognition, ideally due to well-known and quality products or services.
Companies can therefore build their economic moats by achieving economies of production scale, building a network effect, and amplifying a brand, among other work. In doing so, companies get back high consumer loyalty, high market power, and in many cases assure critical legal protections/patents along the way that make it very difficult for other companies to compete with them.
Should you own companies with an economic moat?
I believe so.
While any company let alone any sector could be ripe for disruption, at some point, I believe owning companies that have a competitive advantage puts a few odds in your investing favour – in that if a company’s success is hard to replicate let alone beat, it could be a more sustainable and durable company if/when disruption does hit.
Morningstar Research Inc. has in the past, described an economic moat as how likely a company is to keep competitors at bay for an extended period. Morningstar analysts tend to give ratings for a company, with an economic moat, in various industries.
Recently, Morningstar.ca had this post when it comes to owning moaty Canadian banks.
I believe there are other worthy, moaty Canadian stocks to put in your portfolio:
- Canadian National Railway (CNR)
- Canadian Pacific Railway (CP)
Maybe you don’t realize it, but Canada’s railway industry is a prime example of a wide moat at play for generations. Check out the returns compared to index ETF star XIU for a comparable.
Essentially, both CNR and CP have a stranglehold on the transportation of goods around the country. Even when another massive recession hits, railways will still run. Something to consider.
- Waste Connections (WCN)
Waste Connections is the one of the largest players in the waste management industry. This company has also adopted a unique strategy of serving rural clients with exclusive waste management arrangements to fend off competition. Moaty to me!
Check out the return for WCN compared to indexed ETF XIU:
Waste Connections performance has been nothing short of impressive and longer-term, that performance is likely to continue.
Beyond Canadian banks, railways and WCN in particular, you might also want to consider Dale Robert’s Canadian Wide Moat 7 as individual stocks to buy and hold and buy some more.
From Dale, here is the portfolio and 2022 returns for the stocks vs. another low-cost ETF VDY.
As per Dale:
“The Canadian Wide Moat 7 has delivered greater total returns and with less volatility and less drawdowns in corrections. The market beat is somewhat consistent with the Beat The TSX Portfolio beat of over 2% per year.”
You might also add for Canadian moaty stocks many utility companies as well: Fortis (FTS), Emera (EMA), Northland Power (NPI) and even Algonquin Power (AQN) despite a recent dividend cut.
Should you not want any individual stock risk, then no problem, consider owning low-cost ETF XIU – one of my favourites.
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products and services that have wide, sustainable moats around them are the ones that deliver rewards to investors.” – Warren Buffett
Because a future siege to the moaty castle or fortress could come at any time, a moat must be sustainable over the long haul. Keep in mind the water could dry up. The enemies could start a war. Patents expire. Consumer needs and expectations shfit. Yet for the most part, owning a basket of moaty stocks could put the odds of financial gains and long-term durability in your favour.
Further Reading:
You can find out how I built my portfolio here.
Here is the Beat the TSX approach and the stocks that tend to do it.
More Weekend Reading…
Wild stats of late…going to get worse for some before it gets better?
This 2022 Joe Debtor study (subscription/The Globe and Mail) examined 2,700 personal insolvencies filed in Ontario. “Hoyes Michalos says 49 per cent were filed by millennials aged 26 to 41, even though they make up 27 per cent of adult Canadians.”
From the article: “Unfortunately, a lot of people out there are living on the edge of their affordability”…
I always enjoy these 5i Research Market, Model Portfolio, and Report Updates – March 30, 2023.
(A reminder as a My Own Advisor reader you get full-access, during your free trial, to all of 5i’s research reports, all the model portfolios, top companies and best ETFs to own.)
Of Dollars and Data wrote about the following:
From Jon Chevreau’s Hub:
On the moaty-stock theme, Dividend Growth Investor highlighted dividend aristocrats for more research.
Will AI get rid of Financial Advisors, eventually? It might and that’s ready for financial disruption given the plethora of low-cost ETFs, that can help investor behaviour given money managers cannot consistently beat the index anyhow.
Do you invest with a financial advisor or money manager, if so, why?
Will AI Replace Financial Advisors? by @awealthofcs https://t.co/PGI0xhjeRp
— Mark Seed (@myownadvisor) March 31, 2023
And finally, for some insightful breaking news this week – LOL:
Breaking news🚨🚨🚨
Who would’ve thought? pic.twitter.com/YdIZNGgq2F
— Finance Philosopher 🖌 (@FinPhilosopher) March 31, 2023
Have a great weekend!
Mark
(Moat image credit: Francesco Ungaro; Pexels)
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I love the no nonsense approach to investing shown on this site. We have 15 individual Canadian stocks. Any advice on when to journal over from Canadian to American stock equivalent? For example we have WCN.to to journal over eventually. I’m thinking wait until the value of the canadian dollar increases…
Thanks very much. Nice to hear from you on this, Christopher.
Really depends on the journalling stuff, good advantages as you know: keep the same stock/ETF units; avoid currency exchange fees; avoid commissions, etc. It’s really about getting your $$ in the currency you want, given some CDN stocks have so much business in the U.S. and abroad and therefore they pay their dividends in USD $.
All my best 🙂
Mark
Thank you for the post Mark! yes those moaty companies are amazing, I hold those 7 companies in Dale’s portfolio and more , as for growth companies CNR represent the biggest chunk in my portfolio and it did well I also love their dividend increases bought ATD in my wife’s portfolio few months back and it’s up 16% already what an amazing company , the one I’m debating is CP I also love the company it’s just the irregular dividend increases that I don’t like about it but perhaps once the merger is done they’ll be able to go back on track and resume that as for now I’m looking to increase my position in BIP and BEP because it looks like the world is solid foccus on green energy and our government latest budget indicate that we well.
Great stuff, Gus. I suspect many dividend investors in Canada own those 7 companies in Dale’s portfolio, but yes, don’t forget some railroads (CNR, CP), WCN and ATD and low-yielding but growth oriented companies as key options too!
I also like, haved liked and owned BIPC and BEPC for some time. It is my hope both with “take off” in the coming decade. We’ll see!
Mark
As of today, we own shares in 31 Canadian companies across seven sectors.
Nine of these companies have been sidelined in the portfolio due to extremely slow or no dividend growth over the last few years. In other words, I won’t be buying new shares unless dividend growth starts to pick up, or else they may be ripe for an opportune sale at some time in the future.
I dunno. Moat type businesses remind me of fail safe and as I’ve learned the hard way over the last forty years of investing, “there ain’t no such thing”.
I thought Dome Petroleum in the 80’s was on to a great thing. Oil exploration in the Beaufort Sea. How could it all go wrong?
Two Bronfman brothers, part of Edper Investments and all it’s associated branches in one huge conglomerate. I don’t think investors got much out of that one. That started collapsing in the late 80’s through to the mid-90’s. Royal Bank obtained Royal Trustco. Original Royal Trustco got a bunch of worthless assets. You may find a few remnants of the conglomerate in Brookfield but I don’t want to complicate things.
Another was the Reichmann family who invested in major real estate projects. Everything looked fine until they took a step too far with Canary Wharf. Successful later, but too late for the original stock investors.
How can you go wrong with a funeral chain? Well you could if you owned shares in Loewen Group. Brought down in a lawsuit judgement down in Mississippi.
Waste Connections makes me think of Laidlaw International. Another one that expanded too fast and ended up in bankruptcy by the early 2000’s.
Seagram Company Ltd. I still wince at that one. One of the largest distilleries in the world. Talk about terrible management decisions that brought the whole company down and investors with it.
Then there was the at one time humongous company on the TSE, Nortel. I couldn’t believe it. Watched our own shares go down to worthless. Been better off buying cases and cases of beer instead, like the old joke at the time. Enough said on that one.
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Now I just diversify as much as I can in Canadian companies that I find interesting, in various sectors and hope they continue giving giving back to investors like they have in the past. Of course it doesn’t always work out that way with some of them moving forward into that misty future, but I never know which ones until after the fact.
I always think every 9 of 10 Canadians have lost money on Nortel, including my husband. LOL.
My husband never wants to touch equity market after that. I have made lots of mistakes of my own. But hey, if you lose money and learn from it, that’s tuition fee you paid. If you lose money and didn’t learn anything from it, then the money lost forever.
Personally I try not to have any one stock to exceeds 5% of my portfolio. With AQN, I lost 2.5% of my portfolio, well, that’s still affordable. Looking back though, among EMA, FTS and AQN, obviously AQN is the more risky one. As a DGI investor, this is not the first time I made mistakes with chasing yield. Hopefully I have learned my lesson and will not make the same mistake again in the future.
Regarding to wide moat companies, I still don’t own CP and WCN, only CNR. Maybe now is a good time as any time to begin to buy some.
I think that’s always going to be the challenge with individual stocks = individual stock risk.
If you own the index, they you decide to own all the studs and duds.
I’ve owned CNR, CP and WCN for many years now and will only add more over time. That’s the plan anyhow!
AQN will come back believe. It will take time.
Mark
I see where you are coming from: many things can seem moaty until they are not but I stand by my thoughts as well that such companies that do have a competitive advantage tend to reward investors more than not. Nortel was simply fraud and bad management at the same time but that can and does happen!
How many companies do you own now?
Mark