Consider This Model “Wide Moat” Portfolio

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Source: Thinkstock

Source: Thinkstock

Yesterday I wrote an article in which I highlight the importance of isolating companies that have wide economic moats as quality investment choices. An economic moat is an intrinsic market advantage that a company has over its competitors in virtue of one or more of the following three qualities:

  1. The company has infrastructure in place that is extremely expensive and burdensome to replicate.
  2. The company has brand recognition that gives it an inherent market advantage over its competitors with weaker brands.
  3. The company has unparalleled knowledge, generally in the form of a patent, that give it the unique ability to produce a product and a de facto monopoly in that particular market.

There are several companies with economic moats, and I think that a quality portfolio needs to be invested in these companies. In this article I point out three that investors should consider. I think that if you buy shares in these three companies that you should be able to do extremely well. Note, however, that I am not alone in this opinion, and the market has bid up shares of these companies. No matter how wonderful an investment opportunity might seem to be it is always a good idea to wait for pullbacks and corrections. Every quality investment sees its share price drop substantially at some time or another. By recognizing the power of economic moats and by understanding why these companies have economic moats, you will have the confidence to buy these stocks when everybody else is selling.

1. CSX Corp. (NYSE:CSX)

CSX is in the rail transport business. Of the above qualities that characterize an economic moat CSX, as well as its peers, have the first one—it has infrastructure that is extremely costly and burdensome to replicate. CSX owns over 20,000 miles of track in the eastern part of the U. S. and in part of Canada. It would cost billions of dollars for another company to replicate CSX’s infrastructure, and for this reason I think it is a quality investment.  It only has a handful of competitors, and only one — Norfolk Southern (NSC) competes directly with CSX in this region. Note that I chose CSX over Norfolk Southern because I own shares — I was lucky enough to be able to buy some inexpensively earlier this year when the company reported bad earnings.

CSX is within 1 percent of its all-time high of $29.45/share, so investors may want to wait for another pullback in order to take a position. Still, the stock trades at 16 times earnings, which is well below the 20+ earnings multiple investors are willing to pay for the S&P 500, so buying now may not be such a bad idea.

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