We like to know that our investments will continue providing solid returns, not just in the near term but in the future. This is why we developed the economic moat rating at Morningstar. We assign three different moat ratings to the stocks under our coverage: no moat, a narrow moat, and a wide moat.
The moat rating helps identify the stocks that will withstand economic downturns and maintain a competitive edge. It can also be a useful tool to study a fund to find out whether the portfolio is future proof.
The list is not static. Moat trends reveal whether a stock is working towards a stronger rating, or whether it is losing ground to competitors. These 14 stocks, however, are the mega moat stocks: the ones that have already achieved a wide-moat status but are on a continuous winning streak.
Cheapest Wide Moats
Salesforce.com (CRM)
4-star stock Salesforce.com provides enterprise cloud computing solutions to manage customer relationships. Sales Cloud is its main software-as-a-service product, and it offers customer, marketing, commerce, app building and data integration tools.
We believe Salesforce.com represents one of best long-term growth stories in software. It grew 36.82% during 2020, and even as revenue growth is likely to dip below 20% for the first time at some point in the next several years, Morningstar’s equity analyst Dan Romanoff believes ongoing margin expansion should continue to compound earnings growth of more than 20% annually for much longer.
Ambev (ABEV3)
Brazilian Ambev, another stock with 4 Stars, is the largest brewer in Latin America by volume and the fourth-largest beer producer in the world. It produces, distributes, and sells beer and PepsiCo products in Brazil and other Latin American countries with a monopolylike position in some of these markets. It also owns Argentina's largest brewer, Quinsa.
It has seen a couple of negative years. It was down 13.96% in 2020 and down 3.04% year-on-year for the past three. Despite this, Ambev is a highly profitable business. The company has a well-entrenched cultural focus on cost management, and implemented zero-based budgeting over a decade ago. In its core markets, its customer relationships allow it to react quickly to negative competitive events. Throughout much of Latin America, Ambev’s cost advantage is powerful and helps to sustain its high market shares.
European Wide Moats
Assa Abloy (ASSA B)
Three European stocks also feature on our list. Swedish Assa Abloy has the world’s largest installed base of locks, protecting some of the most security-sensitive buildings, including the European Parliament in Brussels. About 75% of its revenue comes from government and commercial customers.
We believe Assa Abloy to be fairly valued, with a 3-star rating, but also that its growth potential is significant. Mornigstar director Denise Molina cites two key drivers: first, an industrywide shift toward software-driven products, expanding functionality and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader. The company has also had a solid year so far, growing 31.28%, and 14.74% on a 3-year annualised basis.
ASML (ASML)
Dutch ASML operates in the foundry space. The 2-star stock provides semiconductor manufacturers with equipment for photolithography, the process of printing and expanding extremely small patterns onto futuristic chips. The technology is used for PCs and smartphones, but is also integral to the buildout of cloud services and emerging opportunities like AI, 5G, semi- and fully autonomous vehicles, and the broader “Internet of Things”.
We believe ASML has a wide economic moat based on its intangible assets around equipment design expertise, its research and development cost advantages, and as the leader in its field, it has a considerable scale and technology superiority. It’s grown 89.94% so far this year, following a 51.73% growth last year. Over the past three years, the annualised growth is 67.57%.
Adyen (ADYEN)
Another Dutch firm made the list, Adyen, and the stock is the only feature with 1 Star. The payments company provides merchants with a single platform to accept e-commerce, mobile, and point-of-sale payments in multiple countries using various payment schemes and methodologies. It has built systems for the likes of Uber and Spotify.
Adyen is popular because it works across the value chain, including online, in-store, and mobile payments, through one single service. It also provides fraud detection and has impressive transaction and payment data to support growth. Investors like Adyen because it provides exposure to the same growth fundamentals as tech giants while also generating cash. It has grown 44.17% this year alone, but grew 160.60% in 2020.
