There's an exclusive group of companies in the stock market that stand out because they've got what billionaire investor Warren Buffett calls economic moats. Like medieval castles, their profits are fortified by impregnable business models... and there are signs that National Research (NSQ:NRC) might be one of them.
Given the present disruption and volatility in the stock market, it is more important than ever to identify high-quality stocks for your portfolio - and finding companies with moats is one way to do it.
Moats come in different forms, but they mostly consist of:
- Intangible Assets - Such as brands that customers love, valuable patents or regulatory approvals
- High 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
Here's a quick guide to finding the clues to economic moats - using National Research (NSQ:NRC) as an example...
National Research (NSQ:NRC)'s impressive metrics
Some of the biggest indicators of a moat involve persistent strong margins and high levels of cash generation – cash being especially important given the recent shocks to the worldwide economy. Here are a few ways of gauging these characteristics - and how National Research 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 National Research, the figure is an impressive 26.9%.
- 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 National Research, the figure is an eye-catching 44.0%.
- High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
- National Research has a 5-year average ROE of 50.2%.
- High Operating Margins (compared to peers) - the measure of a company with pricing power
- National Research has a 5-year average operating margin of 29.3%.
Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But it's important to do your own research and dig into the numbers yourself...
To find out more you might want to take a look at the NSQ:NRC 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 with moat-like characteristics, 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 - which gives you everything you need. So why not come and take a look?