The Wide Moat 32: My Berkshire Hathaway Targets
I have identified 32 potential wide moat companies selling at reasonable prices, which I am calling The Wide Moat 32. Understanding sources of enduring competitive advantage are critical components of any good analysis, and finance and strategy are joined at the hip in my view. However, I think that Buffett, in his letters to shareholders, explains the importance of having a competitive advantage better than I can:
Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.
A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed. (Source: Berkshire Hathaway 2007 Shareholder Letter, p.6)
Below, I have screened for companies with high returns on invested capital (15%+) over the past 5 years and the past twelve months, with debt/equity less than 20%, a market cap between $5B-$20B, and have a stock price that is down over the past 52 weeks. I have allowed for technology oriented companies to be included in this list, as competitive advantage definitely exists in this industry in certain places and I’m a lot more comfortable with technology companies than Buffett or Munger.
I agree that certain technology firms should be avoided where no real competitive advantage exists, although there are plenty of exceptions where technology companies have attractive business models and a competitive advantage. For example, it is undeniable that software companies have attractive business models that allow for high returns on invested capital due to the inherent operating leverage present in the business, and it would be hard to argue that Microsoft (MSFT) lacks an enduring competitive advantage through an established network and high switching costs. Hardware companies are less likely to have moats than software companies, although even in hardware there are examples like chip maker Intel (INTC) that would meet Buffett’s low cost producer criteria resulting from Intel’s scale.
The Wide Moat 32
CH Robinson Worldwide (CHRW)
CR Bard (BCR)
Bed Bath & Beyond (BBBY)
Fastenal Company (FAST)
WW Grainger (GWW)
Staples (SPLS)
EOG Resources (EOG)
Genuine Parts Company (GPC)
Fluor (FLR)
Expeditors International of Washington (EXPD)
Paychex, Inc. (PAYX)
Forest Laboratories, Inc. (FRX)
Coach, Inc. (COH)
Analog Devices, Inc. (ADI)
The Gap Inc. (GPS)
Reed Elsevier NV (ENL)
Zimmer Holdings (ZMH)
Reed Elsevier plc (RUK)
Infosys Technologies Limited (INFY)
Franklin Resources (BEN)
T. Rowe Price Group, Inc. (TROW)
Stryker Corporation (SYK)
Adobe Systems Incorporated (ADBE)
Jacobs Engineering Group (JEC)
Best Buy Co., Inc. (BBY)
Cognizant Technology Solutions Corp. (CTSH)
Noble Corporation (NE)
Texas Instruments Incorporated (TXN)
Cummins Inc. (CMI)
Precision Castparts Corp. (PCP)
Baker Hughes Incorporated (BHI)
National-Oilwell Varco, Inc. (NOV)