Find a Moat, Become a Goat

Find a Moat, Become a Goat

By Philip Dudley

Would you rather be a Moat or the Goat?

A moat is a wide, deep trench usually filled with water surrounding a castle or fortress and provides security and protection from outside forces. Being the goat is simply being the greatest of all time, as in a Michael Jordan here, a Tom Brady there. And in investing, sometimes you can be the goat, with a moat.

An economic moat is a reference to the defensive characteristics a particular company may exhibit to sustain competitive advantages or maintain its market share and long term profitability. Nothing is more important, especially in today’s rapidly changing business world where disruption is commonplace.

The durability of the competitive advantage makes it difficult for competitors to replicate. While a wide economic moat helps keep competition at bay, there are definitely some companies that will lose an advantage because of mismanagement. Think of Kodak or, more recently, Intel.

So, what are some examples of companies thriving with an effective moat? Apple maintains a dominate smartphone position and the ecosystem built around it makes it difficult to even think about an alternative.

Amazon has enormous scale in e-commerce, its Prime membership is second to none and the Jeff Bezos-owned company also is a leader in cloud computing. Microsoft dominates the office software suite, cloud computing and gaming/ social platforms with their Xbox and LinkedIn businesses.

And who doesn’t love a soft drink in a red can? Coca Cola is one of the most recognizable brands in the entire world and the company has deep global partnerships that are difficult to replace. Visa and MasterCard have a duopoly on electronic payment processing. As cash use dwindles in society, these two players continue to grow their moat.

And think about the every day products of Johnson & Johnson? By know, you surely get the point.

The challenge lies in identifying companies with a growing and sustainable moat. Potential investors must analyze industry trends, assess competitive advantages, have confidence in management and do their homework on profit margins, return on invested capital, free cash flow, debt-to-equity, earnings per share growth, dividend growth and sustainability to name a few.

Bottom line: do your homework but also be sure to relax and have a look around. You just might discover the next goat with a moat.

Philip Dudley is the managing partner of Dudley Capital Management in Middleburg at 115 The Plains Road, Suite 250.