It wasn't long ago that the S&P 500 index entered correction territory after its 10% decline from August through October. That all seems like a mirage now as stocks are coming off their best week of the year, with the S&P 500 and Nasdaq Composite indexes posting their largest weekly gains since November 2022.
There is much debate about whether the S&P 500 entered a new bull market earlier this year or the recent selling was a continuation of the bear market that started in January 2022. Regardless, the market had its best week of the year, and one Warren Buffett stock that surged higher along with it is Moody's (MCO 0.25%). If we are entering a new bull market, Moody's is a no-brainer. Here's why.
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Moody's holds a significant competitive advantage in a hard-to-break-into industry
Moody's Corporation is one of the largest credit ratings businesses in the U.S. and a crucial player in the fixed-income markets. The company provides credit ratings to corporations, governments, or other entities that some of the world's most prominent investors use to make decisions and manage risk.
The company has a substantial competitive advantage because of the high barriers to entry in the credit ratings business. For one, stringent oversight and regulatory hurdles make it difficult to break into the industry. Second, it takes time for a company to establish that trust with clients and investors, and Moody's has a long-standing reputation that is hard to overcome.
According to the Securities and Exchange Commission, Moody's has a 32% share of the credit ratings market. Only S&P Global's 50% market share is larger. Moody's robust economic moat is a big reason Buffett's Berkshire Hathaway has owned the stock for more than two decades, making it one of the conglomerate's longest-held stocks.
High interest rates led to fewer debt issuances by governments and corporations in recent years
What makes Moody's appealing is its critical role in the debt-issuance market. The company was a big beneficiary of the low interest rate environment of the 2010s as businesses issued tons of debt at generationally low interest rates. However, the higher interest rate environment, which has also seen lots of volatility, has made corporations more reluctant to issue debt and has weighed on Moody's performance in recent years.
According to the Securities Industry and Financial Markets Association (SIFMA), U.S. fixed-income securities issuances, which include Treasuries, mortgage-backed securities, and corporate bonds, were down 34% in 2022. Although last year was more in line with pre-pandemic levels, Moody's earnings still took a hit as revenue fell 12% and net income plummeted 38%.
Data source: YCharts.
The company has done an excellent job riding out the downturn
Fixed-income securities issuance remains subdued in 2023, down another 12.5% from last year. Moody's cites elevated inflation, higher interest rates, and volatility in global capital markets amid military conflicts as reasons for continuing subdued activity.
Despite the slowdown, Moody's earnings have shown signs of recovering this year. Through the first nine months of the year, revenue rose 6% while net income increased 12%. Growth was driven by improving issuance volumes as participants slowly returned to fixed-income markets and solid performance from its analytics business.
Moody's can shine in a new bull market
Moody's has done an excellent job of riding out challenging market conditions without seeing its earnings take too much of a hit. It has also been an excellent stock for long-term investors. Over the past two decades, it has delivered investors a total return of 1,350%, trouncing the S&P 500 index, which has returned 507% in the same period.
If we are, indeed, on the cusp of a new bull market, Moody's welcomes it with open arms. That's because a bull market is generally associated with less uncertainty about the economy and reduced volatility, which makes companies more willing to issue debt to pursue growth opportunities. It's in this type of market that Moody's can shine, which is why this Buffett stock is a no-brainer buy for the next bull market run.
