Free Reports

This Buffett Company Enjoys Not Just One, But Two Moats...

Apr 8, 2016

In this issue:
» Credit Growth from Industry Remains Tepid
» Nitin's take on China
» ...and more!
0:00
Radhika Pandit, Managing Editor of ValuePro

Ask anybody to name the culprits behind the 2008 global financial crisis, and banks will surely be at the top of the list.

And why not? As the lines between aggressive investment banking and traditional banking blurred, the unravelling of the credit crisis brought all these big banks to their knees. They begged, and they were bailed out.

Little wonder banks have since been seen as hotbeds of greed and corruption. Citigroup, Deutsche Bank, and others were slapped with hefty fines for their misdeeds. Their share prices since the crisis have tanked.

But are all banks big bad boys?

Warren Buffett certainly doesn't think so. In fact, Wells Fargo is one of the top five stocks in the Berkshire Hathaway portfolio.

In an earlier edition of the 5 Minute WrapUp, I talked about how low-cost competitive advantage is an important moat that tends to get overlooked. I used Wells Fargo as the perfect example.

In a commoditised industry such as banking, it pays to keep costs under control and stay lean. Wells Fargo has managed to do just that.

But that's not the only moat around Wells Fargo. Indeed, a second moat called 'switching costs' protects the bank.

What does it mean? Switching costs refer to factors that make it difficult or undesirable for consumers to switch to the products or services of a competitor. The factors include time, capital, convenience, etc. If the switching costs are high, a firm can lock in its customers and charge them higher prices because it knows they're reluctant to switch to competitors.

Would you change your bank account every time some other bank offers higher interest? Most probably not because of the hassle and cost of opening and closing bank accounts, particularly when most mega banks are perceived as comparable to one another.

Wells Fargo serves one in three households in the US. This level of convenience and brand recognition are two reasons it's enjoyed such strong deposit growth. The company maintains industry-leading distribution channels, including storefronts, ATMs, online, and mobile. This has allowed Wells Fargo to serve customers in more locations than any other bank. It's hardly surprising it's one of Buffett's favourite stocks.

My ValuePro team and I look for such stocks for the ValuePro portfolios. We only select stocks that meet strict 'Buffett-would-buy criteria'. For both our portfolios, we have bought banking stocks...stocks that Buffett would certainly be interested in were he to invest in India.

Do you think that 'switching costs' is a very strong moat that can help companies generate healthy returns? Let us know your comments or share your views in the Equitymaster Club.


--- Advertisement ---
Profit From Junior Blue Chips...

We have released our latest Special Report on the best of the best small caps - Junior Blue Chips!

Yes, we believe Junior Blue Chips possess the high growth potential of small caps along with the stability of blue chips.

That is an amazing combination every investor would want in his portfolio.

And the best part is you can get this report for FREE!

Just click here to know how...
------------------------------

2:31 Chart of the day

There has been a pick-up in credit from September onwards. During the period February 2015 to February 2016, bank credit offtake has grown by 11.5%. The growth has been powered by incremental demand from personal loans, agri and services segments. Each of these segments posted double-digit growth during this period.

However, loan demand from industry continues to remain tepid registering single-digit growth of 5.4%. While bank credit intake by the large industry players has witnessed some improvement and recorded a 7% growth in this period, the micro, small and medium industries remain far from recovery. In the past one year, loan demand by micro and small industry grew by a mere 1.7% whereas credit intake by the medium industry players has fallen by a steep 11.1%.

To aid credit growth, the Reserve Bank of India has cut interest rates by 1.5% so far. However, the transmission of rates by banks has been much lower. Hopefully, with the marginal cost of funds based lending rate that comes into effect from April 2016, banks will be in a better position to pass on the rate-cuts. However, more than this, the revival in the broad economy will play a key role in bringing about a more sustainable recovery in credit demand.

Credit Growth from Industry Remains Tepid

3:32

China's stupendous rise to the second largest economy in the world in the past few years has become a role model for the other Asian countries. However, today China is in the news for all the wrong reasons. Sluggish demand and excess capacity are threatening to slow down its economic engine that had been growing at frenzied pace in the past. And lack of transparency in the government and banking entities in China have made it difficult to decipher the reasons for the same.

The need of the hour is to have reports on economic developments that more credible and trustworthy. And that is where the Nitin Gregory fills the gap. Nitin is a new writer in Equitymaster, currently in China and taking a very close look at some of the key economic and competitive factors that we can otherwise have no access to. In his latest article, he gives his on-the-ground outlook on the ways of rebalancing between investment and consumption in the Dragon nation.

You can look forward to more 'on the ground' stories on China ...wherein Nitin promises to cover topics like... The broad theme of the next few years for China will be rebalancing. - How will the consumption patterns change? Will there be a rise in services? What are the drivers of the housing market? How will currency changes impact the debt levels?

4:16

By now you know that on 22 April 2016, we will be celebrating our 20th anniversary. It is a time of ruminations and on this occasion we'd love to hear from you. In case you wish to share your experience with Equitymaster or read what some of our valued long time subscribers have to say about us, please do so here.

Here's what Mahesh Shroff, an Equitymaster Reserve Member from Mumbai, had to say about his experience with Equitymaster:

  • Congratulations to Equitymaster for completing 20 years of honest services to its customers.
  • I don't remember exactly when I subscribed to your services but it must have been more than 10 years. Before, I was depending on my broker's advises to buy and sell stocks as I was busy with my business. I started realizing that the broker was advising good scrips but at market rates which were too high and hence I was stuck with them for a long time and losing money. So, in my search for some genuine advice, I kept looking upon a suitable agency. This is when I came across your website. I began reading the daily columns by Mr. Ajit Dayal and others.
  • Soon, I realized that this is the advice I was looking for. I realized that long term value investing is the way to go. So, I began with your various services like StockSelect, MidcapSelect, Hidden Treasure etc. As I started benefitting, my faith increased in these services. Today, I am a lifetime member of your Equitymaster Reserve and very happy that I made the right choice. Remaining in daily touch on line, I now do not fear the market cycles and am able to invest in your suggested scrips.
  • I am, therefore, a very satisfied Equitymaster customer and would continue to use your suggestions for my investments.
  • I take this opportunity to wish you all the best for the future.
4:45

Indian markets had a rather volatile trading session today as the markets oscillated to either side of yesterday's close. At the time of writing, BSE Sensex was trading lower by around 12 points. Buying was largely seen in banking, FMCG, and healthcare stocks, while auto, and IT stocks, were at the receiving end.. The BSE Midcap and BSE Smallcap also did well and notched gains of 1% each.

4:55 Today's investment mantra

"The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst) and Madhu Gupta (Research Analyst).

Today's Premium Edition.

GSK Consumer: Can the Non-Core Business 'Boost' Growth?

Will the shift in focus revive growth for the company?
Read On...Get Access

Recent Articles

Insider Just Hit a Century...and Still Batting Strong December 16, 2017
A glimpse of my three-point mission at Insider...
Why You Shouldn't Shun Pharma Stocks... December 14, 2017
Despite Indian Pharma facing US FDA issues, not all developments are a cause for worry.
Let Safety Work FOR Your Retirement Not AGAINST It December 12, 2017
A small group of people have been using this strategy, to retire wealthy, over the past fifteen years.
Which Chips Do You Want to Own - Black, White or Blue? December 9, 2017
The best way to retire wealthy - Buy real blue chips over poker blue chips

Equitymaster requests your view! Post a comment on "This Buffett Company Enjoys Not Just One, But Two Moats...". Click here!

  
DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.