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A Quantitative Approach To Finding Wide-Moat Stocks

Urbem Capital profile picture
Urbem Capital


  • Unarguably, companies with moats generate superior shareholder returns over the long run.
  • But what is the easy way to identify and verify wide-moat stocks?
  • Here is a quantitative approach along with a few picks.

In one of the previous articles, we focused on the importance and characteristics of moats when it comes to stock investing: by keeping the competition away, companies with wide moats are able to consistently capture a great portion of their economic value, and hence, generate superior returns for their shareholders over the long haul; a truly high-quality stock should possess a wide moat, demonstrating one or preferably a combination of such characteristics as brand power, network effect, economies of scale, proprietary technology.

In reality, investors (especially those individual ones) often find it time-consuming to evaluate and difficult to predict the competitive advantage of businesses one by one, and the qualitative analysis of economic moats is subjective and error-prone. Hence, we would like to introduce the quantitative approach consisting of several easy-to-get metrics for investors to filter out wide-moat stocks or as a sanity check to verify pre-determined moat width.

Return on Equity (or Return on Invested Capital)

Warren Buffett often uses consistently above average return on equity (ROE) as his favorite indicator for wide-moat stocks. ROE intuitively tells how efficient the management allocates equity capital (on behalf of shareholders) to generate returns.

A company with high leverage typically will have much higher ROE than a company with no leverage, but this advantage is a result of the capital structure instead of actual business performance. At the end of the day, debt can work for or against you (as equity investors), depending on whether management turns that money into reasonable profits. Therefore, ROE may give you a false picture. Instead, we believe that return on invested capital (ROIC) is a much better alternative performance metric to find quality investments as it measures the return on all invested capital, including the debt-financed capital.

Businesses with high capital efficiency over a long period

This article was written by

Urbem Capital profile picture
Urbem Capital is the research arm of Urbem Partnership. Unlike most other equity research institutes, we purely focus on the rare species of wonderful businesses for the long run - that is less than 0.1% of all public companies worldwide.For more, check out founder Steven Chen's GuruFocus publications - https://www.gurufocus.com/ic/space.php?uid=451967&do=article

Analyst’s Disclosure: I am/we are long NTES, TCEHY, NVO, FDS, CLX, NVZMY, INFY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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