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How to Find Stocks with Moats

  • (0:30) - Finding Strong Investments With A Competitive Edge In Their Industries

  • (4:45) - Top Stock Picks With Moats: Tracey’s Watchlist

  • (34:00) - Episode Roundup: AMZN, NFLX, NVDA, URI, HEES, SHW, CTAS, BA, VLO

  • Podcast@Zacks.com

 

Welcome to Episode #366 of the Value Investor Podcast.

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.

This week, Tracey is looking at companies that have moats.

Warren Buffett has talked about moats many times over the years. He loves companies that have one.

What is a Moat?

A moat is literally what it says. It is a wide ditch that surrounds a castle or a town which provides protection in case of an attack.

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In the case of companies, it’s when the company has some kind of competitive advantage in its industry that others cannot overcome. That company can pull up the drawbridge, so to speak.

But there are several ways to get to moat status. A company can get a moat by being “first in” in a new industry or product. But it will eventually lose its competitive advantage. Think of Apple and the iPhone. It had a moat, initially, in 2007 but that didn’t last long.

A company can also get a moat by being so big it can behave in a particular way when its competitors cannot. Amazon, for example, is one of the few companies that can afford to grow a network of distribution centers across the globe.

How Can You Find Moat Stocks?

There really is not a screen for a moat stock. You mostly know them when you see them.

1.       Netflix (NFLX)

Netflix has had two moats in its lifespan. The first was the little red envelope in which it used to send out DVDs to customers. It was the first in in mailing DVDs on a big scale.

Netflix’s second moat was the streaming service. It was also first in on that. Netflix is trading at 35x forward earnings. It’s not cheap on a classic value basis.

Does Netflix still have its moat after a half a dozen other streaming services have entered the game?

2.       United Rentals, Inc. (URI)

United Rentals is the largest equipment rental company in the world. If that’s not a moat, I don’t know what is.

Shares of United Rentasl hit new highs earlier in the year, but have fallen 7.4% in the last month. United Rentals is cheap, with a forward P/E of 14.8. Investors also get a dividend, yielding 1%.

Should investors look outside of technology to a company like United Rentals to find moats?

3.       NVIDIA Corp. (NVDA)

NVIDIA is one of the largest producers of chips for AI. For now. NVIDIA is also one of the top companies in gaming chips.

Analysts are bullish. NVIDIA’s sales are expected to rise 73.8% this year and earnings are forecast to jump 84%.

Does NVIDIA have first in advantage on AI which gives it moat status?

4.       Cintas Corp. (CTAS)

Cintas makes uniforms and other items businesses need to get ready for the work day. Cintas is a large cap company with a market cap of $67.2 billion.

Shares have been on a tear the last 5 years, gaining 210% versus the S&P 500 at just 72.5%. But it’s not cheap. Cintas trades with a high P/E of 44.8.

Does Cintas have a moat in the uniform business?

5.       Valero Energy Corp. (VLO)

Valero Energy is the largest independent refiner in the United States. It owns 15 refineries in the United States, Canada and the United Kingdom. Valero Energy has a market cap of $53 billion.

Valero is cheap, with a forward P/E of 9.6. It pays a dividend, currently yielding 2.6%.

There hasn’t been a new refinery built in the United States in decades and refineries are billion-dollar facilities. It take a lot of cash to build one.

Does Valero have a moat thanks to the high costs of entry?

What Else Do You Need to Know About Moats?

Tune into this week’s podcast to find out.

 

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Netflix, Inc. (NFLX) : Free Stock Analysis Report

NVIDIA Corporation (NVDA) : Free Stock Analysis Report

Valero Energy Corporation (VLO) : Free Stock Analysis Report

Cintas Corporation (CTAS) : Free Stock Analysis Report

United Rentals, Inc. (URI) : Free Stock Analysis Report

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