Owning Monopolies 2 Untouchable Companies with No Competition in Sight It has long been one of the most fundamental axioms of basic economics: success invites competition. Regardless of the industry, any company that finds a way to earn outsized profits will sooner or later attract competition. Over time, competitive pressures tend to erode the excess returns that a company can generate, eventually driving returns toward the firm's cost of production. Follow the Leader For example, suppose that a high-tech lawn care company named Wireless Weedwacker (symbol: CHOP)

(1.)  What is an Economic Moat?

Just as medieval moats helped protect castles against marauding pillagers, the economic moats of today help companies defend against the encroachments of competitors. The deeper and wider the moat, the longer a firm can avoid the fate suffered by CHOP.

At their core, economic moats are nothing more than sustainable competitive advantages -- factors that give a company a distinct edge over its rivals. Competitive advantages can take many forms, but most can be broken down into one of two broad categories:

• Cost Advantage -- Anything that enables a company to offer a product or service of comparable quality to that of a competitor's but at a lower price.
• Differentiation Advantage -- Anything that allows a company to deliver superior features/benefits and charge a premium price.

Some companies aim to be the low-cost provider in a particular industry, while others choose to differentiate by offering a better product or service. In either case, when a company enjoys a wide economic moat, its rivals cannot easily emulate its business model.

As a result, a firm that has a distinct competitive advantage is in a much better position to continue earning above-average profits -- thereby creating additional shareholder value. In the text that follows, we'll outline seven of the most common types of economic moats.

(2.)  The Seven Types of Economic Moats

High Barriers to Entry:
It stands to reason that highly-competitive industries are generally less attractive (think price wars) than those where only a handful of players share the entire market. Therefore, investors should always determine how easy (or difficult) it is for new companies to enter an existing industry.

For example, it is quite simple to enter the restaurant industry, where capital requirements are relatively modest and highly-specialized equipment is not necessary. Conversely, a much smaller number of companies have the technical expertise and multi-billion dollar R&D budgets to become a large-scale pharmaceutical manufacturer.

All else being equal, it is preferable to look for companies in industries where so-called "barriers to entry" discourage would-be competitors from entering the business.

High Bargaining Power of a Supplier:
To one degree or another, most companies are dependant upon their suppliers.

A pizza restaurant chain must find a reliable source for dough, cheese, pepperoni, and other necessary ingredients. Similarly, a retail toy store has to locate a supplier of games, puzzles, sporting goods, and other related merchandise.

When it comes to suppliers, those that exert a high degree of bargaining power over their customers typically enjoy a wide economic moat. There is no formulaic method of finding such companies, but the most conducive environment for a supplier to become powerful occurs when a small group of vendors sell an integral product (with no alternatives) to a diverse group of customers.

Brand-Name Recognition:
The importance of a popular and trusted brand name simply can't be overstated. Companies that work hard to cultivate a positive brand image connoting quality are usually rewarded with a loyal base of customers that keep coming back for more. In many cases, those same customers are also willing to pay premium prices for their favorite brands. 

High Switching Costs:
At the beginning of this article, we explained why many companies facing increased competition are forced to either lower prices or surrender market share. However, what if there was something else that might prevent customers from abandoning ship?

When the cost (or hassle) of switching to a competing product or service is high, customers are sometimes inclined to stay put -- even if they might receive a better deal from another company. 

For most products, switching costs are minimal. For example, it costs nothing to switch from a brand-name cereal like Frosted Flakes to a cheaper generic alternative. However, this is not the case with many other products.

Low-Cost Provider:
It's almost always beneficial to be able to offer a product or service for a lower price than everyone else. This is true regardless of the industry, but is particularly valid when it comes to commodity-like products where it is difficult to distinguish one from another.

It goes without saying that price-conscious consumers will naturally gravitate to the companies that offer the most bang for their buck. Therefore, the ability to maintain competitive prices serves as a durable competitive advantage that can dig a near impenetrable moat.

Some companies attribute their low costs to bargaining power with suppliers. Others point to such things as economies of scale or supply chain efficiencies. As it happens, retailing giant Wal-Mart (NYSE: WMT) benefits from all three of these factors.

The Network Effect:
The so-called "network effect" occurs whenever an increase in a firm's customer base can increase the value of a given product or service, which attracts more customers, which increases the value even more -- and so on.

Intangible Assets:
Most of the companies that benefit from a wide economic moat fall into one of the six broad categories above. However, there are some with competitive advantages that are difficult to categorize. 

For example, a pharmaceutical firm might capitalize on a key patent, or a software developer might hold valuable intellectual property rights. Sometimes, the deepest economic moats lie in the most unusual places. In the case of garbage hauler Waste Management (NYSE: WMI), it lies in its 280 landfills.

Our research staff searched the StreetAuthority database for companies that exhibit one or more of the economic moats described above. After extensive research, we have identified two particular companies that stand to deliver outsized profits for years to come thanks to the competitive advantages they hold over their competition . . . 

Both have already been mentioned in this report, but now we'll take the opportunity to provide a more in-depth profile.

END OF FREE CONTENT

The remainder of this report is available exclusively to paid subscribers. In it, we provide in-depth analysis of two stocks with wide economic moats that allow them to outperform their competitors quarter after quarter. These competitive advantages should allow our picks to prosper in the coming months and years. 

Thanks for reading today's special report -- Owning Monopolies

Good investing!

-- Research Staff
StreetAuthority.com
http://www.StreetAuthority.com

StreetAuthority LLC
839-K Quince Orchard Blvd. 
Gaithersburg, MD 20878-1614

Please note that StreetAuthority, LLC is not a registered investment firm or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. StreetAuthority does not purport to tell or suggest which investment securities members or readers should buy or sell for themselves. Site users should always conduct their own research and due diligence and obtain professional advice before making any investment decision. StreetAuthority will not be liable for any loss or damage caused by a reader's reliance on information obtained in this newsletter or on our web site. Our readers are solely responsible for their own investment decisions.

The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in this report should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions.