In this piece, we will take a look at the 13 best wide moat stocks to buy according to hedge funds. If you want to skip our primer on wide moat investing, then head on over to 5 Best Wide Moat Stocks To Buy According To Hedge Funds.
Among the countless ways in which companies on the stock market are segregated, one way is classifying them according to wide moat or narrow moat. In a nutshell, wide moat stocks are firms that are believed to have significant competitive advantages that are expected to make them stand out from peers for more than a decade. For firms that do not have these advantages, the term is ‘narrow moat’, and naturally, most media and investor attention often focuses on the former grouping with several exchange traded funds listing these companies as part of their investments.
This economic moat as it’s called comes courtesy of no one else but Warren Buffett of Berkshire Hathaway. Mr. Buffett is known for investing in firms that he believes have a sustained competitive advantage over their peers and then holding their stock for years to let the price appreciation accrue and make the investment grow in value. Mr. Buffett has been talking about wide moats for decades now, and one latest example of his reliance on the term came during a shareholder letter in 2017 where he described the advantage that the Government Employees Insurance Company or GEICO has due to its wide moat. According to him:
GEICO’s low costs create a moat – an enduring one – that competitors are unable to cross. As a result, the company gobbles up market share year after year, ending 2016 with about 12% of industry volume. That’s up from 2.5% in 1995, the year Berkshire acquired control of GEICO. Employment, meanwhile, grew from 8,575 to 36,085.
The term was repeated again on the next page, with economic moat investing being a crucial part of Berkshire’s investment philosophy as the Oracle of Omaha shared:
Berkshire’s great managers, premier financial strength and a range of business models protected by wide moats amount to something unique in the insurance world. This assemblage of strengths is a huge asset for Berkshire shareholders that time will only make more valuable
So, what is an economic moat and how does it affect a company’s competitive advantages? Well, these advantages can come through a strong product that makes switching costs high (think for example how Apple Inc. (NASDAQ:AAPL)’s ecosystem makes it difficult for long time users to switch), having a low cost production advantage that competitors cannot keep up with, or have superior technology that competitors are unable to match (for instance, SpaceX’s rockets are the only ones of their kind that can autonomously land, which provides the company with a great cost advantage as it does not have to make a new rocket for every launch).
Naturally, a firm’s management plays a crucial role in developing economic moats to reap years of advantages. Management can create economic moats by investing in new technologies, acquiring firms that have competitive technologies, and trimming down the hedges by removing unprofitable businesses or products and focusing on ones that can compete well in the market.
Using these principles, we can also try to guess which firms have a wide moat that could help them in their industry for decades to come. Well, one notable example is Amazon.com, Inc. (NASDAQ:AMZN) which is one the largest electronic commerce retailers in the world. Amazon’s moat comes through the popularity of its platform, which is a household name and the firm maintains its advantage by employing thousands of drivers and operating numerous fulfillment centers to ensure that a competitor does not have a chance of beating it in scale. Using scale as a criterion for a wide economic moat, another giant in the retailing industry, and one which might not see any serious rivals in the future unless it’s due to its own mistakes, is Walmart Inc. (NYSE:WMT). Walmart is the largest retailer in the world, with more than two million employees, more than ten thousand stores, and a unique competitive advantage where it offers consumers the lowest prices on everyday products to make sure they return every time.
Before we get to our list of the best wide moat stocks that are favored by hedge funds, it’d make sense to replug Warren Buffett’s wisdom here from 1999 when he commented:
Move on to failures of airlines. Here’s a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact–though the picture would have improved since then–the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero. Sizing all this up, I like to think that if I’d been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough–I owed this to future capitalists–to shoot him down. I mean, Karl Marx couldn’t have done as much damage to capitalists as Orville did. I won’t dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example.
But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
So what are the wide moat stocks that hedge funds are buying? Some top picks are Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc. (NASDAQ:GOOGL).
Photo by David Martin on Unsplash
Our Methodology
To make our list of the best wide moat stocks that hedge funds are buying, we narrowed down the top 30 holdings of the VanEck Morningstar Wide Moat ETF and then selected the top 13 companies with the greatest number of hedge fund investors as of Q1 2023 end.
Best Wide Moat Stocks To Buy According To Hedge Funds
13. Ecolab Inc. (NYSE:ECL)
Number of Hedge Fund Investors: 53
Ecolab Inc. (NYSE:ECL) is a chemicals company headquartered in Saint Paul, Minnesota. It provides water treatment services, and sanitization products for industrial use. The firm beat its second quarter analyst EPS estimates and the average share price target is $198.10.
During Q1 2023, 53 of the 943 hedge funds part of Insider Monkey’s database had bought a stake in Ecolab Inc. (NYSE:ECL). Out of these, the firm’s largest shareholder is Michael Larson’s Bill & Melinda Gates Foundation Trust since it has a $863 million stake.
Just like Amazon.com, Inc. (NASDAQ:AMZN), Meta Platforms, Inc. (NASDAQ:META), and Alphabet Inc. (NASDAQ:GOOGL), Ecolab Inc. (NYSE:ECL) is a wide moat stock that hedge funds love.
12. Intercontinental Exchange, Inc. (NYSE:ICE)
Number of Hedge Fund Investors: 61
Intercontinental Exchange, Inc. (NYSE:ICE) is an American firm that is best known for operating the largest stock exchange in America, the New York Stock Exchange. Naturally, this provides it with a wide economic moat since the NYSE is quite difficult to compete with due to the large listing of firms and its popularity among investors.
Insider Monkey took a look at 943 hedge funds for their first quarter of 2023 shareholdings to discover that 61 had invested in the company. Intercontinental Exchange, Inc. (NYSE:ICE)’s biggest investor in our database is Natixis Global Asset Management’s Harris Associates with a $1.2 billion investment.
11. Biogen Inc. (NASDAQ:BIIB)
Number of Hedge Fund Investors: 67
Biogen Inc. (NASDAQ:BIIB) is a pharmaceutical firm that makes and sells treatments for a variety of ailments such as Alzheimer’s disease, leukemia, and lymphoma among others. Its Alzheimer’s treatment won the FDA’s approval last year and the stock is rated Buy on average.
As of March 2023, 67 of the 943 hedge funds part of Insider Monkey’s research had held Biogen Inc. (NASDAQ:BIIB)’s shares. D. E. Shaw’s D E Shaw is the firm’s largest stakeholder since it owns a stake worth $370 million.
10. Comcast Corporation (NASDAQ:CMCSA)
Number of Hedge Fund Investors: 68
Comcast Corporation (NASDAQ:CMCSA) is one of the biggest companies in America. It owns a variety of communications and media brands, which provides it with a unique competitive advantage when it comes to the scale and scope of its reach.
During this year’s first quarter, 68 of the 943 hedge funds profiled by Insider Monkey had held a stake in the firm. Out of thee, Jean-Marie Eveillard’s First Eagle Investment Management is Comcast Corporation (NASDAQ:CMCSA)’s biggest shareholder since it owns 32.6 million shares that are worth $1.2 billion.
9. Gilead Sciences, Inc. (NASDAQ:GILD)
Number of Hedge Fund Investors: 69
Gilead Sciences, Inc. (NASDAQ:GILD) provides treatments and medicines for serious diseases such as HIV/AIDS and hepatitis. The firm’s revenues from HIV drug sales buoyed its second quarter profit as other factors such as a legal settlement still reduced its net income.
During Q1 2023, 69 of the 943 hedge funds part of Insider Monkey’s database had invested in Gilead Sciences, Inc. (NASDAQ:GILD). Jim Simons’ Renaissance Technologies is the firm’s largest investor through a stake worth $878 million.
8. Pfizer Inc. (NYSE:PFE)
Number of Hedge Fund Investors: 73
Pfizer Inc. (NYSE:PFE) is a pharmaceutical giant that enjoys a wide economic moat due to its scale and global operations base. Like Gilead, its earnings continue to be hampered due to a drop in revenues from coronavirus medicines.
As March 2023 ended, 73 of the 943 hedge funds surveyed by Insider Monkey had bought the firm’s shares. Pfizer Inc. (NYSE:PFE) biggest stakeholder is Jim Simons’ Renaissance Technologies with an investment worth $495 million.
7. Wells Fargo & Company (NYSE:WFC)
Number of Hedge Fund Investors: 78
Wells Fargo & Company (NYSE:WFC) is a diversified bank that is more than a century old and offers personal and professional banking services. It is currently part of a group of ten financial firms that are facing fines from the SEC for their employees using informal channels to communicate about business operations.
78 of the 943 hedge fund portfolios studied by Insider Monkey for their first quarter of 2023 investments had held a stake in Wells Fargo & Company (NYSE:WFC). Out of these, Boykin Curry’s Eagle Capital Management is the largest shareholder through a $933 million stake.
6. The Walt Disney Company (NYSE:DIS)
Number of Hedge Fund Investors: 95
The Walt Disney Company (NYSE:DIS) is one of the largest media and entertainment companies in the world. The firm’s been having a tough time at the box office lately, with a lackluster performance from some titles making it incur almost a billion dollars in loss.
By the end of Q1 2023, 95 of the 943 hedge funds part of Insider Monkey had invested in the firm. Nelson Peltz’s Trian Partners is The Walt Disney Company (NYSE:DIS) ‘s biggest stakeholder since it owns 5.9 million shares that are worth $592 million.
Meta Platforms, Inc. (NASDAQ:META), The Walt Disney Company (NYSE:DIS), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc. (NASDAQ:GOOGL) are some wide moat stocks that hedge funds have piled into.
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Disclosure: None. 13 Best Wide Moat Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.