Sustainable Competitive Advantage and Stock Performance: The Case for Wide Moat Stocks

Posted: 23 Mar 2016

See all articles by Srinidhi Kanuri

Srinidhi Kanuri

University of Southern Mississippi

Robert W. McLeod

University of Alabama

Abstract

“In business, I look for economic castles protected by unbreachable ‘Moats’.” Warren Buffett

Companies that have sustainable competitive advantages should be able to create a barrier (Moat) to prevent or lessen competition from other firms. The wider the Moat the greater the barrier and the more secure the company’s profitability. Using the Morningstar classification of “Wide Moat” stocks, we construct annually rebalanced equal- and value-weighted portfolios to analyze their performance in order to determine if they deliver superior performance relative to standard benchmark portfolios. The period for our analysis extends from June 2002 through May 2014. We find that the “Wide Moat” portfolios outperform both the S&P 500 and Russell 3000 indices generating higher average monthly and annualized returns, Sharpe Ratio, Sortino Ratio, Treynor Ratio, Omega Ratio, Upside Potential Ratio, M2, M2 Alpha and cumulative returns. When we compute alpha using Carhart four-factor and Fama-French five-factor models, we find that “Wide Moat” portfolios had significantly positive risk-adjusted alphas with both the models. “Wide Moat” portfolios also lost less value during the 2007-2009 financial crisis compared to both S&P 500 and Russell 3000. In conclusion, we find that “Wide Moat” stocks have created significant value for their investors over the course of our study.

Suggested Citation

Kanuri, Srinidhi and McLeod, Robert W., Sustainable Competitive Advantage and Stock Performance: The Case for Wide Moat Stocks. Applied Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2753420

Srinidhi Kanuri (Contact Author)

University of Southern Mississippi ( email )

Hattiesburg, MS 39406
United States

Robert W. McLeod

University of Alabama ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-8993 (Phone)
205-348-0590 (Fax)

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