Moaty International Stocks
Morningstar's strategy works just as well beyond U.S. borders.
Morningstar's strategy works just as well beyond U.S. borders.
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.
Allan C. Nichols does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.