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If you’re still in a defensive investing posture after last year’s stomach-churning market, it’s time to consider buying the stocks of companies with impregnable market-leading positions.
Ratings firm Morningstar refers to them as “wide moat” companies.
A “wide moat,” essentially, means a company has a distinct and sustainable competitive advantage over its peers that could protect its business in the event of a recession or a even a shift in the direction of its industry.
The width of a company’s moat is a result of a number of variables, including its size, brand-name strength, unique technologies, and the difficulty its customers may have in switching to a competitor’s products.
Those types of characteristics help keep a company and its cash flow stable in a difficult economy.
And Morningstar says that “companies that have generated returns on capital higher than their cost of capital for many years running usually have a moat, especially if their returns on capital have been rising or are fairly stable.”
Morningstar found seven wide-moat companies with share-price returns ranging from 10 percent to 36 percent this year, a period in which the S&P 500 index jumped 7 percent.
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