20 Small Companies with Great Profits
You don't have to be big to earn large profits.
When you think of companies with strong competitive advantages, you may first think of the brand-name giants. These might include brands like Sony (SNE), Coca-Cola (KO), Ford (F), Starbucks (SBUX), Nike (NKE), Mercedes (owned by DaimlerChrysler (DCX)), and Hewlett-Packard (HPQ)--all of which typically land near the top of the lists of most-recognized brands. You wouldn't be completely wrong to associate big, well-known companies with competitive advantages, but of the companies I just mentioned, only one (Coca-Cola) gets a wide moat rating from Morningstar. Several are no-moat companies.
As a refresher, by moat we mean the size of a company's competitive advantage. If a company has a wide moat, we think it can earn returns on capital above its cost of capital for up to 20 years into the future. That's quite a feat. Typically, those kind of excess returns disappear quickly as competitors pile into the market to capture the excess profits. Whether a company has a strong brand or not is, in itself, immaterial to our decision about the moat.
Haywood Kelly, CFA has a position in the following securities mentioned above: APOL. Find out about Morningstar’s editorial policies.