This Company Is Unbeatable

All I want in life is an unfair advantage.

I'm not sure who first said that maxim, but it's one of the keys to successful investing. Companies with unfair advantages are some of the best investments you can ever make. Some unfair advantages stem from government actions, such as the virtually unlimited free money that banks now receive. Other companies' unfair advantages have been built up over many years of being in business, or within the impenetrable niche a company has learned to dominate.

In the investing literature, unfair advantages are called moats. Warren Buffett has made billions by looking for a strong moat before committing to an investment. Companies that have developed defensible market positions are the best investments to weather Wall Street's ups and downs. When you combine this rare quality with strong growth prospects, you've got the potential to make a killing.

Of course, not all moats are created equal. Here are five that have serious long-term dominance potential.

1. Visa (NYSE: V  )
Visa runs the largest retail electronic payments network in the world, with more than 15,000 financial institutions as customers and more than 1.5 billion cards issued. Anytime someone in the world uses a Visa card to make a purchase, Visa earns a few cents. With more than 60 billion transactions last year, that pocket change quickly adds up. While competitors such as MasterCard and Discover have been around for years, new entrants such as eBay's Paypal have yet to make a dent in Visa's dominance. Visa's worldwide network will ensure its rule over the payment-processing business for years to come.

2. Philip Morris (NYSE: PM  )
Philip Morris is the most powerful tobacco company in the world, with seven of the world's top 15 brands, including top-seller Marlboro. In 2009, the company had an estimated 26% market share in its world markets -- excluding China, where only government-owned China National Tobacco is allowed to operate, and the U.S., where the company's former parent Altria (NYSE: MO  ) is dominant. Its brands' images have been ingrained in people's minds through years of advertising, allowing the company to charge more for its products. Combined with an addictive product, this brand strength means Philip Morris will be a market leader for years to come.

3. Sirius XM Radio (Nasdaq: SIRI  )
When regulators approved the merger of Sirius and XM in 2008, one of the most dominant media companies of the decade emerged. While the company has some issues from its high debt load, the benefit of being the only game in town when it comes to satellite radio should more than outweigh this. Sirius XM has nearly 20 million subscribers, which approaches Comcast's 22.9 million video customers, and is better than Netflix's (Nasdaq: NFLX  ) 17 million. Compared with these two, though, Sirius is in a much better position, since it has neither the competitive threats Comcast is facing, nor the huge content costs with which Netflix will contend going forward. As long as the company can manage its debt woes, it's sure to be a winner.

4. Coke (NYSE: KO  )
In a recent study by professors at Baylor College of Medicine, people were unable to distinguish Coke and Pepsi in a blind taste test. However, Coke's brand was found to be so strong that in a separate non-blind taste test, "subjects overwhelmingly preferred drinks that were labeled as Coke, no matter what cola was actually delivered through the tubes."

How does this happen? Coke ads are designed to trigger emotions and the felling of nostalgia. With consistent advertising year after year, this builds into a formidable emotional relationship with consumers, which other purveyors of sugar water simply can't compete against.

5. Baidu (Nasdaq: BIDU  )
At a press conference in May of last year, Warren Buffett and Charlie Munger remarked "Google has a huge new moat. In fact I've probably never seen such a wide moat." Being the first company to combine search and advertising has led Google to a dominant 65% share of the U.S. search market and a market cap of $188 billion.

Similarly, Baidu was the first mover in the Chinese market.The company also got a helping hand from the Chinese Communist Party, which has led it to its astounding 73% share of the Chinese search market. Currently, only about a third of the Chinese population is online. As the Chinese economy continues to develop, and Chinese consumers gain more wealth, Baidu is sure to be a winner for years to come.

Five recommendations
While these five companies aren't recommendations, they are a good place to start. For some opportunities that the Fool does recommend, click here to get our free report, 5 Stocks The Motley Fool Owns -- and You Should, Too.

Dan Dzombak recommends you read The Best Investment Advice You Will Ever Get if You Have Under $100k. He does not own shares in any of the companies mentioned. His musings and articles he finds interesting can be found on his Twitter account: @DanDzombak.

Discover Financial, Google, and Coca-Cola are Motley Fool Inside Value recommendations. Baidu and Google are Motley Fool Rule Breakers picks. eBay and Netflix are Motley Fool Stock Advisor recommendations. Philip Morris International is a Motley Fool Global Gains pick. Coca-Cola is a Motley Fool Income Investor choice. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Altria Group, Coca-Cola, Google, and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (29) | Recommend This Article (99)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 22, 2010, at 12:43 PM, tomika888 wrote:

    Again M Fool ...you can only fool innocent and unexperienced investors........shame on our self.......! your news letters are worthless......you are not helping how to invest wisely ...your 'predictions" is always wrong at least 90 % of the time........ and this is really amazing that you are still in business.....toomany naive people buying into your M really fool news letters.......

  • Report this Comment On November 22, 2010, at 2:28 PM, southernbeachguy wrote:

    I totally agree with your assesment of Sirus. It has the Best product, great programming and no competition. If you try it a week you will never want to be without a Sirus or XM Radio in your car.

  • Report this Comment On November 22, 2010, at 2:46 PM, waterinfo wrote:

    The Moat around SiriusXM is wider and deeper than that around most companies, including the other 4 companies mentioned in this article. The other 4 companies' moat is based primarily on branding and brand recongnition. Certainly, SiriusXM has exclusive brand recognition with respect to satellite radio, with brand recognition greatly enhanced with the sale of every auto in the United States that offers or includes a SiriusXM radio.

    However, beyond brand awareness, SiriusXM enjoys the protection that any possible competitor has a very, very large barrier to entry. The cost, complexity, licensing requirements, and regulatory requirements of anyone launching a comptitive service is so large as to protect for the foreseeable future the exclusivity of SiriusXM product.

    Yes, it is alleged that Internet distribution of audio music content can be a competitor. However, the characteristic of satellite broadcast means that the existing capital investment can support millions and millions of additional customers without additional capital. That is not the case for Internet based methods of audio distribution, where additional bandwidth and capacity is need for each additional active subscriber. That is the very reason that the wireless internet providers are moving to increasing use of volume based service agreements and pricing.

  • Report this Comment On November 22, 2010, at 7:00 PM, Willustop wrote:

    PM is a welfare company. It sells an addictive product that kills peoples and destroys lives through COPD. The rest of us pick up the medical tab from its reckless behavior. If the true cost of it's product was priced in, few would buy cigarettes and fewer would buy the stock.

  • Report this Comment On November 22, 2010, at 7:15 PM, TMFDanDzombak wrote:

    @southernbeachguy Thanks

  • Report this Comment On November 22, 2010, at 7:24 PM, TMFDanDzombak wrote:

    @waterinfo The only person I see who could maybe challenge Sirius is Dish/Echostar's Charlie Ergen. However the installed base of receivers + the deals with gm and ford would make it very hard to become a serious competitor and probably not worth his time.

    On your second point, I've never tried wimax so Im not sure if you could easily switch between waystations. It will be a while before a serious competitor emerges.

  • Report this Comment On November 22, 2010, at 7:26 PM, TMFDanDzombak wrote:

    @waterinfo If an ansible were ever invented, that might kill sirius.

    http://en.wikipedia.org/wiki/Ansible

    However this violates multiple laws of physics

  • Report this Comment On November 22, 2010, at 7:27 PM, TMFDanDzombak wrote:

    @GermanInvestors In your blog posts, besides just posting data, you should try adding some analysis of the stocks you post.

  • Report this Comment On November 22, 2010, at 7:32 PM, TMFDanDzombak wrote:

    @Willustop At least in the U.S., rising cigarette taxes slightly aid in this. Check out

    http://en.wikipedia.org/wiki/Pigovian_tax

    If insurance companies were allowed to charge rates based on people's behavior that would also be interesting. Doubt it would ever happen, but it'd be interesting.

  • Report this Comment On November 22, 2010, at 8:59 PM, kcsag wrote:

    The constant drumming up of Atria and PM has to stop. You can find it in almost 50% of the posts here at MF, which leads me to believe that there is strong financial backing from the company. If you were to rely solely on the posts here, you would think Atria is a steal at its current prices. It is not, simply because the domestic market is shrinking and as the public comes to grips with the hazards of smoking and the burden on the society it entails, it has nowhere to go but south.

    Until then, fool on!

  • Report this Comment On November 22, 2010, at 9:14 PM, TMFDanDzombak wrote:

    @kcsag As the Internet & Technology editor at the Fool, I assure you neither the writers nor the Fool itself recieves financial backing from any company we mention.

  • Report this Comment On November 22, 2010, at 9:18 PM, TMFDanDzombak wrote:

    @kcsag On your second point, as of last night the Fool had published close to 1500 articles so far this month. Of those 1500, 13 mentioned PM and 26 mentioned MO, or 0.86% and 1.73% respectively.

  • Report this Comment On November 22, 2010, at 11:02 PM, waterinfo wrote:

    To TMFDanDzombak,

    WiMax is no more an answer to continuous digital stream distribution than is WiFi, 3G or 4G wireless. While WiMax expands the available bandwidth considerably compared to 3G or WiFi, it does not provide enough bandwidth to continuously broadcast more than 200 different radio channels, simultaneously from every cell tower around. Thus, user specific digital streams would have to be established to each individual user, based upon that user's current channel choice; not much differerent than setting up a user unique stream for a phone call.

    More importantly, you know when you switch channels on your Sirius or XM receiver there are a few seconds of synch (or signal acquistion time). How much would you enjoy your music, if while you were driving along at 75 miles per hour, your signal dropped out for 5 or 10 seconds, every few miles while the signal was reacquired from the next cell tower. This is not a problem with email, text messaging, and in many cases even a phone call. God knows, we have all become accustomed to phone calls dropping pretty frequently on our wireless phones, especially when driving along. But trying to listen to radio programing, while the signal drops every few minutes would be another story. Maybe Howard Stern's programming would be unaffected, but most other programs would be seriously diminished in value.

  • Report this Comment On November 22, 2010, at 11:33 PM, TMFDanDzombak wrote:

    @Waterinfo Thanks

  • Report this Comment On November 22, 2010, at 11:51 PM, Notfooled1 wrote:

    THE MOTLEY FOOL is like a race track tout. They recommend thousands of stocks every year which, in total, always lag the markets.

  • Report this Comment On November 23, 2010, at 11:11 AM, TMFDanDzombak wrote:

    @Notfooled1 @tomika888 Shout-out to all my haters!

    http://www.youtube.com/watch?v=LWXli9gYhwA

  • Report this Comment On November 23, 2010, at 11:54 AM, kcsag wrote:

    Thanks for the clarification TMFDanDzombak. I am giving Fool benefit of the doubt and shall hold my judgment until proven otherwise.

  • Report this Comment On November 23, 2010, at 1:59 PM, pete163 wrote:

    We already know that Sirius XM is an up coming Block Buster Stock, ready to take off. When did you fine this out?

  • Report this Comment On November 23, 2010, at 2:21 PM, langco1 wrote:

    there is little doubt at this point that sirius will fail most likely in less than a year....

  • Report this Comment On November 23, 2010, at 2:24 PM, langco1 wrote:

    bidu has far more power than a slowly failing google which when all is said and done is little more than a online phone book.....

  • Report this Comment On November 23, 2010, at 2:25 PM, langco1 wrote:

    coke was a great company but 20 years ago during its major growth stage since then it has done little.....

  • Report this Comment On November 23, 2010, at 6:07 PM, TMFDanDzombak wrote:

    @pete163 I wouldn't call a stock a Block Buster stock. I associate that with Blockbuster, a bankrupt stock.

  • Report this Comment On November 23, 2010, at 6:08 PM, TMFDanDzombak wrote:

    @langco1 how is bidu different?

  • Report this Comment On November 24, 2010, at 5:50 AM, TMFZahrim wrote:

    @waterinfo, your nightmare scenario of dropping signal every few minutes on a car ride with 3G, 4G Internet radio is already misguided. I take a lot of car trips from Tampa to Miami, going through the Everglades on Alligator Alley. Even there, in the most desolate space I know, the media streams on my cell phone never pauses perceptibly when switching from one tower to another. For me, phone plus Pandora plus a simple connection to the car stereo is entertainment nirvana. Plus, if you don't like a Pandora song, you can skip to the next one every so often. On XMSiri, you'd have to change the station, no?

    Anders

  • Report this Comment On November 24, 2010, at 9:22 AM, waterinfo wrote:

    to TMF Zahrim

    You have described probably the ONLY scenario where digital packet streaming will work reasonably well. Straight, flat, and very low traffic. No multipath reflections. No packet collisions from multiple users trying to access the same channel simultaneously. Try driving in the hills and mountains from Charlotte, NC north into southern Virginia. Or try driving around New York City or Chicago with heavy traffic (both cars and cell phone users) competing for the same capacity, coupled with signals blocked by buildings and hampered with multi-path reflections distorting the signals and causing fades and drop outs. I don't think that you would still be enjoying your Pandora very much.

  • Report this Comment On November 26, 2010, at 11:44 AM, akaluna wrote:

    To anyone who may be able to clarify: As far as competition for Sirius, I would imagine besides the issues that have already been mentioned as hurdles to entry, what about the encryption of the data? Since many of the subscribers (if not almost all) listen to Sirius in their vehicles, would a competitor be able to use the installed radio in a vehicle for another provider?

    In comparison if you have Time Warner cable and digital music , your Comcast, Verizon, ATT, Dish, Direct TV, etc. setop box will not function.

    I am thinking that this may be the single largest barrier to entry for anyone. The radios may have proprietary decryption. If so I doubt even Charlie Ergan could convince folks to rip out the radio from their Dash and put his in.

  • Report this Comment On November 27, 2010, at 11:20 PM, galivantstomt wrote:

    Coming from a family of tobacco growers in I'd like to set set the record straight. First of all, the government acreage allocation program has been eliminated and tobacco farming is now a free market business in which large farmers mow sell directly to the cigarette companies and the farmer is dead. The fewer producers of tobacco the higher the price is apt to become. Most important however is the competition the American Companies are facing from the growing Asian growth and production of tobacco products from the Philippines and China who I might add is among the largest consumer of tobacco in the world and still growing.

    I think American tobacco products are, in the long run, not going to successfully compete in the Asian market with its cheaper raw material cost and production

    Health issue aside, with the Asian competition surrounding American cigarettes from Asia, I don't see any of them being a good long term investment.

  • Report this Comment On November 29, 2010, at 1:23 PM, sdecru wrote:

    Good article. I already have V since its IPO debut and Sirius Xm since it was $0.05 as part of my portfolio. Just goes to show....do your own research b/c by the time a company makes for a good article it has already left the dock and your swimming to catch it. No thanks. I like to get on broad while the ship is still at dock..ie havnt made articles.

  • Report this Comment On November 29, 2010, at 2:36 PM, ddepperman wrote:

    Might be good to look at John Mauldin's Outside the Box eletter article, Shadow Over Asia. The Chinese economy is headed for a fall as the Party wastes resources to keep up the appearances of a strong economy. There IS a real estate bubble! So as to Baidu's future, there might be doubt.

    So how to play this one?

    People will get rich off its collapse.

    Merry Christmas to all of us!

    ddepperman

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