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Morningstar Minute: Moat Stocks Built on Disruption

R.J. Hottovy, CFA

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R.J. Hottovy: I'm here to talk about widening moats, and I have chosen to focus on the consumer sector, which on the surface may seem like a very unusual place to look for widening moats.

It's been a difficult time for a lot of consumer-facing companies. We have seen a shakeout among a number of traditional retailers and a number more that are struggling to generate any kind of profitability in today's age. But at the same time if you look at the root source of what's causing the pressure in these industries, I think you see a lot of indications of widening moats.

One of the key disruptions we have seen among specialty retailers is the emergence of e-commerce and more recently, mobile commerce, so companies like Amazon and eBay. We think this has been disruptive because we are seeing an increase in the network effect, which is one of the key things we look at in evaluating economic moats.

As more and more users flock to these sites for low cost, wide selection, and expedited shipping, it's attracted a wider audience of merchants and advertisers and increased the value of the entire network in the process.

We are also seeing a similar phenomenon in online travel, where companies like Priceline and TripAdvisor have also seen benefits by the number of users that have come in their direction, as well.

So when looking at the consumer space we think it's important to look at the sources of disruption because you might just find a company with a widening moat.