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Stock Strategist

20 Small Companies with Great Profits

You don't have to be big to earn large profits.

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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.