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The Motley Fool: Corporate Moats


Ask the Fool: Corporate Moats

Q. What does it mean when a company has a “moat”? — V.C., Wilmington, Delaware

A. Moats have been used to keep intruders out of castles, and a company with a moat has one or more competitive advantages that can protect its market position and defend against competitors or would-be competitors.

There are many kinds of competitive advantages — such as a strong brand, valuable patents, economies of scale, high barriers to entry and high switching costs for customers. Boeing, for example, benefits from high barriers to entry: It would be extremely costly for any company to try to start building airplanes. Many customers might not change their cable company because it would be a big hassle. Apple’s powerful brand means that it can charge high prices for its offerings — and many customers end up with multiple Apple products, making it hard to switch away.

Q. How can I know what stocks my mutual fund holds? — P.H., Erie, Pennsylvania

A. In general, you can’t know what a fund holds from day to day, but most funds release lists of their holdings at least monthly or quarterly. You should be able to find such reports on fund company websites, and also at sites — such as Morningstar.com — that offer information on a wide range of funds.

Don’t assume that any list is 100% up to date, though, because a fund may have sold some or all of its position in a stock since the report was issued — and may have loaded up on some other securities. Some fund managers also practice “window dressing” — selling some stocks that have taken losses and buying others that have gained before the end of a reporting period to look better to investors.

Fool’s School: Finding Winners With Screens

There are more than 6,000 different stocks listed on the New York Stock Exchange and the Nasdaq Stock Market. It can be hard to figure out which of them might be terrific investments, so try online stock screeners to help narrow down a group of candidates for your portfolio to a manageable size.

When using a stock screener, you set some criteria describing the kind of stocks you’re looking for, and the screener will deliver stocks that meet them. For example, you might want stocks with market capitalizations of at least $5 billion, earnings growth rates of at least 10%, price-to-earnings (P/E) ratios of 20 or less and dividend yields of 2% or more.

If the screener returns way too many results, you can tighten your requirements a bit, or add another. If there are too few results, loosen your requirements, or eliminate one.

Screening can be useful, but don’t trust it blindly. There may be amazing stocks out there with most, but not all, of your desired characteristics; if so, the screener will never bring them to your attention. Also, a screener is only as good as its data, so stick with reputable screeners using reliable data. If you’re not sure, just research any promising company more deeply.

There are many screeners out there, some free and some not. Some offer a pared-down free version and charge for more features.
For starters, check out the screeners for stocks and/or mutual funds at Finance.Yahoo.com, Zacks.com, Finviz.com, StockRover.com and Morningstar.com. Your brokerage may offer a screener for you to use, too. Many screening services not only let you play around with their screener, hunting for gems, but they also offer preset filters, such as lists of promising dividend payers or fast-growing small stocks.

Don’t base any investment decisions solely on screening results, though, because they will always omit some factors that can be important — such as the quality of a company’s management and your confidence in it, the value of its brand(s) and its competitive advantages.

My Dumbest Investment: A 100,000-Share Mistake

My dumbest investment? I was a victim of a pump-and-dump scheme. I fell for it because I never thought a stock could fall so low. On the upside, it’s the only stock I’ll ever own 100,000 shares of. They’re worth $90 total today. — A.N.R., online

The Fool responds: Many investors have put a lot of their hard-earned money into penny stocks, only to end up, unknowingly, as participants in pump-and-dump schemes. Penny stocks are those trading for less than about $5 per share. They’re generally tied to small, unproven companies whose stock can be easily manipulated. In a common scheme, people hype them in online communities and newsletters in order to inflate the stock price due to rising demand, then sell their shares, sending the price plummeting.

Consider a representative penny stock, which was recently trading at $0.07 per share. (That’s right, less than a dime per share.) It would cost you only around $7,000 to buy a whopping 100,000 shares. That might seem like a bargain — after all, buying 100,000 shares of, say, Microsoft would cost you more than $20 million! But Microsoft is very likely to be worth more in the future, while a $0.07 stock, tied to a company with hardly any revenue and with years of losses, could very easily become a $0.02 stock, or even a $0.001 one — especially if it’s pumped and dumped.

Foolish Trivia: Name That Company

I trace my roots back to 1891, when I was launched to distribute chemicals in New York City. I published a medical-treatment manual in 1899, which proved very popular. I moved into pharmacological research in 1933 and entered the animal health arena in 1948. I’ve been a major player in vaccines, too, helping prevent pneumonia and hepatitis B, among other diseases. Today, based in Rahway, New Jersey, I’m a pharmaceutical giant; my market value recently topped $250 billion, and my annual revenue tops $50 billion. My drugs include Singulair, Januvia and Keytruda. I merged with Schering-Plough in 2009. Who am I?

Last Week’s Trivia Answer

I trace my roots back to 1899, when I was launched as the Reading Glove and Mitten Manufacturing Company. I expanded into silk lingerie in 1920 and changed my name to Vanity Fair Silk Mills. I bought the maker of Lee jeans in 1969 and the maker of Wrangler in 1986 — then spun off my jeans businesses in 2019. Today, based in Denver and with a recent market value topping $11 billion, I’m a major active-lifestyle company; my outdoor, active, workwear and streetwear brands include Dickies, Eastpak, JanSport, The North Face, Smartwool, Timberland and Vans. Who am I? (Answer: VF Corp.)

The Motley Fool Take: Growing Renewables

Brookfield Renewable Corporation (NYSE: BEPC) has been a phenomenal wealth creator over the years. The renewable energy giant has delivered roughly 17% annualized total returns since its inception in 1999, growing a $10,000 investment into more than $370,000.
Brookfield’s clean energy infrastructure business generates stable cash flow, primarily backed by long-term power purchase agreements that sell its electricity to utilities and large corporate buyers. Over the long term, its goal is to pay out 70% of that cash flow to investors via its dividend.

The current bear market has given investors the opportunity to buy shares at a great price, as they were recently about 30% below their 52-week high. That decline in its stock price also pushed Brookfield’s dividend yield up above 4%.

Not only does it offer an attractive income stream, but Brookfield also expects to continue growing rapidly. It projects that its funds from operations will grow about 10% or more annually through at least 2027, thanks to inflation-linked rate increases, higher electricity prices, development projects and possible mergers and acquisitions. Such growth should easily support Brookfield’s plan to grow its dividend at a 5% to 9% annual rate. (The Motley Fool owns shares of and has recommended Brookfield Renewable Corporation.)

— distributed by Andrews McMeel Syndication





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