When I look for stocks to buy, one of the first things I consider is whether or not the company has an economic moat – something that protects it from competition. And I think there are some FTSE 100 shares that fit the bill.
This is something that Warren Buffett talks about a lot. As Buffett puts it:
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 low-cost producer […] or possessing a powerful world-wide brand […] is essential for sustained success.
Finding a business with a good moat is key to long-term investing success. With that in mind, here are three UK stocks that I think have enduring economic moats.
Diageo is one of the leading manufacturers of spirits. A bit like Coca-Cola (one of Buffett’s most famous investments), the company’s economic moat comes from its enviable brand portfolio.
The company owns the best-selling gin brand (Gordon’s), the best-selling vodka (Smirnoff), and the best-selling scotch (Johnnie Walker). This gives it something that no other company has.
A strong brand allows a company to charge a premium price for its products, improving its margins. It can then use the excess cash to reinvest into marketing its brands, giving it an enduring advantage over its customers.
Another stock that I think has a good economic moat is Rightmove. The company owns the UK’s largest online property platform and its size gives it an advantage over competitors.
Rightmove’s business is protected by a network effect. Estate agents advertise on its platforms because that’s where buyers look for properties, and buyers look there because it’s where estate agents advertise.
With over 80m more visits per month than its nearest competitor, Rightmove has a compelling proposition to agents. Competitors would find it difficult to attract agents with fewer visits, making it harder to attract more buyers.
Last on my list is Halma. The company is actually a collection of smaller businesses and its economic moat comes from the characteristics of its subsidiaries.
Halma focuses on acquiring businesses that occupy dominant positions in niche markets. This gives them protection from larger and smaller competitors.
For larger competitors, the size of the market isn’t big enough to justify the investment required to compete. For smaller disruptors, the dominant position the businesses occupy makes them hard to displace.
One of the features of Warren Buffett’s investing is a focus on US equities. This is partly because Buffett knows his home market better than anywhere else.
I think there are some great businesses in the UK, though. Diageo, Rightmove, and Halma are FTSE 100 shares that have great economic moats, making them interesting stocks to consider buying to invest like Warren Buffett.