One of the qualities which Warren Buffett is rumoured to seek out in an investment is a wide economic moat. In other words, a company should have a competitive advantage over its rivals which in the long run allows it to maintain more stable sales, higher margins and greater profitability.
For example, having a wide range of brands which come with a significant amount of customer loyalty could be considered an example of a wide economic moat. As such, Unilever (LSE: ULVR) could be of interest. It has a vast stable of brands which each have a significant amount of customer loyalty and therefore allow Unilever to charge higher prices and enjoy more consistent financial performance than is the case for many of its peers.
In fact, that is a key reason why Unilever is forecast to increase its bottom line in the current year by 6% despite weakness in China and the emerging world. And with China in particular expected to become increasingly wealthy as middle income earners swell in number over the coming years, the outlook for the personal care and food brands owned by Unilever is highly encouraging.
Certainly, a price to earnings (P/E) ratio of 20.1 is not exactly cheap, but it is preferable to buy a great company such as Unilever at a fair price, rather than buy a fair company at a great price.
Meanwhile, National Grid (LSE: NG) remains a relatively appealing purchase for value investors due to its resilience and lack of competition. Clearly, its regulator attempts to create a degree of artificial competition so as to keep consumers’ bills lower than they otherwise would be under a monopoly. However, the reality is that National Grid is extremely robust, has resilient earnings and therefore is much easier to forecast than is the case for the majority of FTSE 100 constituents.
Despite this, National Grid trades on a P/E ratio of 15.2. With a number of its utility peers trading on higher ratings, National Grid could see its share price rise following the 74% gains of the last five years. And while Warren Buffett may not be as focused on dividends as is the case for many investors, National Grid’s yield of 4.8% is nevertheless extremely appealing.
With flooring and bathroom specialist Topps Tiles (LSE: TPT) reporting an upbeat trading update just a couple of weeks ago, many investors may view the stock as a very appealing buy at the present time. That’s especially the case since the UK economy continues to move from strength to strength, meaning that cyclical companies such as Topps Tiles are likely to post improved top and bottom line numbers over the medium term.
However, with Topps Tiles trading on a P/E ratio of 15.3 and being forecast to increase its earnings by 9% this year, it seems to lack value based on a price to earnings growth (PEG) ratio of 1.7. That’s because unlike Unilever and National Grid, it is vastly dependent upon the wider economic outlook and so is unlikely to offer substantial resilience during leaner economic times.
So, while Topps Tiles may still be of interest to growth investors who are bullish on the UK economy, for value investors such as Warren Buffett the company appears to lack a wide economic moat. This makes it less appealing than the likes of Unilever and National Grid.
