Moaty International Stocks

While regular Morningstar readers are aware of the importance of searching for moats and seeking a margin of safety in U.S. stocks, they may not be aware that the same strategy works internationally. I am an equities strategist and the editor of Morningstar's InternationalInvestor newsletter. I use the same techniques to look for stocks for my real-money Passport Portfolio.(For more on the Passport Portfolio, click here.)

A Refresher: Moats and Margin of Safety
Warren Buffett has made famous the topic of moats--just as a moat protected a castle from invaders, a company with a moat can protect itself from competitors. Moats are competitive advantages that enable a firm to consistently earn a return above its cost of capital. Examples of firms with moats include low-cost producers, as well as those that sell products with high switching costs or patented technology. Low-cost producers are able to control costs through a more efficient production, and larger-scale or lower-cost inputs (such as owning a mine), which enables the firm to sell its products at a discount to competitors and still be profitable. With switching costs, once a company is installed into a system, it becomes very expensive to replace the provider. So, as long as that provider doesn't really underperform, it tends to continue to provide the service. Patents provide a firm with a temporary monopoly on a product in order to compensate the firm for the costs of developing the product.

Besides seeking companies with moats, we want to buy stocks at a discount to our fair value estimate. Analysts at Morningstar build a discounted cash-flow model on all stocks they cover, and while we attempt to be accurate in our forecasts; our assumptions don't always prove to be correct. In order to protect ourselves against mistakes or unforeseen events, we always demand a margin of safety before buying a stock.