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These Stocks Sport Widening Moats

Many names in the consumer goods sector have the luxury of competitive advantages, and several firms have positive moat trends.

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Paul Swinand: One of the things we look for at Morningstar is firms with competitive advantage. We call them moats. And our research has shown that firms with widening moats do particularly well.

I cover luxury goods and sporting goods. In the luxury goods space, we think a lot of the companies have fantastic competitive advantages, but their moats aren't necessarily widening. Many of the firms have been in existence for over a 100 years. On the other hand, several of our sporting goods names have widening moats. Often, this is because of increasing scale.

If a firm possesses a moat because of its strong marketing and because of its brand image, as it grows, it can spread those selling, general, and administrative costs over a wider base. For example, we'll see companies that over time as they grow, such as expanding internationally, their SG&A costs as a percentage of total will go down and their operating margin will increase, so will their returns on capital, which is how we judge their competitive advantage.

Two of the firms that we have in our sporting goods coverage that have a widening moat or a positive moat trend are Dick's Sporting Goods, which has spread its SG&A costs over a larger base as it's grown, and also Under Armour, which has expanded internationally as it's grown its brand awareness and brand image throughout the world.

Right now, Under Armour is overvalued as most of the market has spotted its positive trend. Dick's has been a little bit either fairly valued or slightly undervalued in a market where a lot of retail names are overvalued. So we like Dick's a little better right now.

Paul Swinand does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.