This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Top Returns From 'Wide-Moat' Stocks

NEW YORK ( TheStreet ) -- Warren Buffett has long talked about the virtues of businesses with "moats."

Such companies rely on strong brands or other advantages to defend their markets from encroachments of rivals. Buffett's favorites include Coca-Cola (KO) and American Express (AXP).

Can wide-moat stocks outperform the markets? Maybe so. Several wide-moat ETFs have delivered solid returns. Among the most promising choices are two products that track a Morningstar index, ELEMENTS Morningstar Wide Moat Focus ETN (WMW) and Market Vectors Wide Moat ETF (MOAT). During the past five years, the Elements ETN returned 10% annually, compared to 4.6% for the S&P 500, according to Morningstar.

Buffett popularized moat companies in a remarkable article that he wrote for Fortune magazine in 1999. At the time, stocks were soaring as investors embraced technology stars. Many investors believed that markets would continue delivering double-digit returns as the Internet introduced a new era of productivity growth.

But Buffett sounded a cautious note. The markets would likely produce annual returns of around 6% in the next 17 years, he predicted. The problem was that prices had become rich.


Conceding that new technology would bring important changes, Buffett pointed to earlier breakthroughs, such as cars and airplanes. Those had altered society, but the stocks of the new products proved to be poor long-term investments.

Buffett said that instead of seeking businesses that can change society, investors should buy stocks with durable competitive advantages. "The products that have wide, sustainable moats around them are the ones that deliver rewards to investors," he wrote.

Within a year, Buffett's forecast appeared prescient. Technology stars crashed, while mundane companies that dominated their markets proved more resilient.

Buffett's thinking had a big impact on researchers at Morningstar who set out to locate companies with wide moats. The researchers began compiling a list of businesses that could dominate their niches for decades.

These days, the Morningstar ranking of wide-moat companies includes such solid performers as Caterpillar (CAT) and Buffett's Berkshire Hathaway (BRK.B).

To develop the index, the Morningstar analysts studied how companies with advantages had performed in the past. What became clear was that many companies achieved strong profits for a year or two and then slipped back to producing mediocre results. In a common pattern, a fashion company would develop a new style that produced a profit surge. But competitors soon developed copies that took away sales.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
MSFT $43.11 0.13%
PFE $34.47 -0.49%
WTW $9.55 -4.21%
WU $19.49 -0.81%
WMT $83.57 1.20%

Markets

DOW 18,135.72 +38.82 0.21%
S&P 500 2,101.04 +2.51 0.12%
NASDAQ 4,982.8090 +15.6680 0.32%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs