Given the present disruption and volatility in the stock market, it is more important than ever to identify high quality stocks for your portfolio. By this, I mean safe, profitable companies with strong balance sheets.
These sorts of stocks are different because they've got what billionaire investor Warren Buffett, calls economic moats. These moats can be divided into different types:
- Intangible Assets - Such as brands that customers love, valuable patents or regulatory approvals
- Switching Costs - It might be too costly, complicated or unnecessary for customers to look elsewhere
- Network Effects - When customers become part of a product it creates tremendously powerful businesses
- Cost Advantages - Superior processes and unique locations and assets make it hard for others to compete
- Great Scale - Large infrastructure and distribution networks are powerful barriers to entry in many industries
Hargreaves Lansdown (LON:HL.) is a well-known, large cap Investment Banking & Investment Services stock, whose share price has fallen significantly in the past year. Almost every investor in the UK is likely to have at least heard of it. I'd like to discover if it has any moat-like characteristics however.
Has Hargreaves Lansdown LON:HL.) got a moat
Some of the biggest indicators of a moat involve persistent strong margins and high levels of cash generation – cash being especially important given it is unclear how the rest of 2020 will pan out. Here are a few ways of gauging these characteristics - and how Hargreaves Lansdown compares:
- High rates of Free Cash Flow - the measure of a thriving company.
- A high ratio of free cash flow to sales can be a very positive sign. For Hargreaves Lansdown, the figure is an impressive 43.3%.
- High Return on Capital Employed - the measure of a company growing efficiently and profitably.
- A 5-year average ROCE of more than 12 percent is a pointer to strong efficiency. For Hargreaves Lansdown, the figure is an eye-catching 78.3%.
- High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
- Hargreaves Lansdown has a 5-year average ROE of 67.8%.
- High Operating Margins (compared to peers) - the measure of a company with pricing power
- Hargreaves Lansdown has a 5-year average operating margin of 60.4%.
Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. By analysing some key medium-term profitability and efficiency metrics, it's possible to start tracking them down. On this basis, it certainly appears that Hargreaves Lansdown has some of the financial traits of an economic moat.
To find out more you might want to take a look at the LON:HL. StockReport from the award-winning research platform, Stockopedia. StockReports contain a goldmine of information in a single page and can help to inform your investment decisions.
To find more stocks like Hargreaves Lansdown, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s Moats of the FTSE 350 - which gives you everything you need. So why not come and take a look?