Here's 5 Quality Stocks With Wide Moats 🏯
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It’s #SundaySpecial!
The markets are hot right now and there’s extreme greed out there.
I’m not one to make macro bets on where the wider market is heading, but I am one to learn from greats like Warren Buffett who famously said:
“Be fearful when others are greedy and greedy when others are fearful.”
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5 Quality Businesses with Wide Moats
S&P Global SPGI 0.00%↑
Here’s the One-Pager:
Description
S&P Global provides data and benchmarks to the capital and commodity markets. It’s credit rating segment is the largest credit rating agency in the world, boasting a market share ~40%.
However, S&P also engages in 4 other segments outside credit ratings, with the highest revenue segment being market intelligence. This segment provides data and advisory solutions, enterprise solutions, and credit/risk solutions mainly in the financial services industry.
S&P’s other business segments include:
Commodity insights
Mobility
Indexes…ever heard of the S&P 500? 😏
Investment Case
SPGI 0.00%↑ boasts a very strong economic moat making it a durable business that will likely steadily compound over time. But why does S&P have such a wide moat?
S&P essentially operates in a duopoly in the credit rating industry with Moody’s MCO 0.00%↑ as both companies control around 80% of the market. Fitch make up most of the rest.
Issuers of bonds/debt normally use both Moody’s and S&P for credit ratings.
Because of the brand name and reputation of Moody’s and S&P, bond and debt issuers are willing to pay higher prices which subsequently leads to higher margins.
There’s high switching costs as most issuers will unlikely switch to alternative credit rating agencies when S&P is already familiar with the business.
Extremely well trusted brand in the indices segment (S&P 500 and Dow Jones) that almost everyone in the investing world is familiar with as important benchmarks.
The economic moat alone makes S&P an extremely attractive investment, but let’s look at growth prospects.
2025 will likely be a year of lower interest rates which likely will lead to companies seeking debt in 2025 which means a lot of new credit ratings will be required.
Notice how much debt is maturing in 2024, 2025, and 2026? That’s extremely bullish for S&P Global, Moody's, and Fitch as future revenues are looking attractive.
Downsides:
Despite the positive outlook above, the numbers for SPGI 0.00%↑ aren’t as attractive as they have been, particularly looking at ROIC and net margins.
Fundamentally, the Company is very sound. But I’d like to see a reversal in these numbers in particular before considering an investment.
Thermo Fisher Scientific TMO 0.00%↑
Here’s the One-Pager:
Description:
Thermo Fisher Scientific is a supplier of scientific equipment, reagents, and software worldwide which became a well-known stock throughout the COVID-10 pandemic where TMO 0.00%↑ developed a successful test kit.
Based in Massachusetts, Thermo Fisher Scientific has been a very successful acquirer of other drug manufacturers such as Life Technologies Corporation, Alfa Aesar, Affymetrix, and PPD.
Investment Case:
Thermo Fisher Scientific boasts a solid moat. Let’s take a look at the reasons why:
TMO 0.00%↑ has a very successful track record of acquisitions (this is important to note going forward). With ~75% of mergers and acquisitions having a negative net return, Thermo Fishers ability to acquire the correct businesses is strong.
In the drug manufacturing business, patents are very important. Thermo Fisher’s patents as well as ability to acquire give investors confidence in the future growth prospects of the business.
Thermo Fisher Scientific invest heavily (around $1B per year) in R&D.
Growth going forward seems strong at an estimated 7%-9% annually, notably due to a lot of successful innovations within the chromatography and electron microscopy business segments.
TMO 0.00%↑ also bought back $3.5B worth of stock in 2023. If you don’t know why this is bullish, then have a read of this article:
Downsides:
Perhaps the biggest risk going forward for TMO 0.00%↑ (and the pharma sector) is the large patent cliff that is hitting the industry over the next few years.
Patent expirations tends to have a large impact on sales, however, TMO 0.00%↑ is very well positioned with it’s acquisition strengths and innovation capabilities to weather this risk.
Zoetis ZTS 0.00%↑
Here’s the One-Pager:
I’ll be going into slightly less detail into the next 3 stocks (to ensure I’m concise and because I have planned deeper dives into the following stocks over the next 8 weeks).
Description:
Zoetis is a niche company (previously a spin-off from Pfizer) and largest player in the animal health industry. Zoetis is split into two main categories:
Livestock
Companion
Zoetis primarily sells products to veterinarians, who, in turn, then offer to their customers. Products of Zoetis include vaccines, parasiticides, dermatology, and-infectives, and other pharma products.
Investment Case:
A growing market share that currently sits at 27%.
Very attractive ROIC and ROE figures (23.6% and 49.9% respectively).
Very attractive margins which are a great signal for pricing power and an economic moat.
A continued surge in pet ownership. 66% of households own a pet (as of 2023 stats).
Copart CPRT 0.00%↑
Here’s the One-Pager:
Description:
Copart operates in a relatively small niche, but it dominates that niche with a 40% market share. The Company operates as an online auction-style marketplace for vehicles or vehicle parts taken off the road due to accidents. They essentially play a large role in the end-of-life cycle for vehicles.
Copart has strong connections with insurance companies. Therefore, when insurance companies deem it not cost-effective to repair damaged vehicles, Copart steps in.
Investment Case:
Inside ownership is an impressive 9.5%. The CEO (3.7% ownership) also has a salary of $1 meaning his compensation is through stock ownership, which aligns management with shareholders.
Extremely strong FCF growth which has been double the revenue growth over the last decade.
Very attractive ROIC of 32% and net margins of 33.1%.
Very strong network effects which maintains a very wide economic moat.
Fortinet FTNT 0.00%↑
Here’s the One-Pager:
Description:
Fortinet is a global leader in the cybersecurity market for organizations, particularly enterprises, communication service providers, government organizations, and small businesses.
Investment Case:
Cybersecurity market has a clear secular trend with expected growth up until 2030 of 14% per year.
Ken Xie and Michael Xie founded the Fortinet in 2000. Ken owns 8.1% of the company and Michael owns 8.9% of the company.
Fortinet has an extremely strong economic moat based on switching costs and network effects.
Fortinet has consistently grown free cash flow at an attractive rate.
That’s it for the day
I hope you loved this article. As I develop on here, I’m sure there will be some changes to my structure and style, so please do leave some feedback for me.
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About the author
Make Money, Make Time is written by Oliver, a qualified CA, and investor who has read over 300 investment books, and spends more than 50 hours per week researching stocks so that you don’t have to. Let’s level-up together!
I like Copart from your list. Been keeping an eye on this successful business.
Great article Oliver! Love Thermo Fisher, Copart and Zoetis and have to do a bit more work on S&P and Fortinet!