In this article, we discuss the 10 narrow moat stocks hedge funds are buying. If you want to read about some more narrow moat stocks, go directly to 5 Narrow Moat Stocks Hedge Funds Are Buying.
Investors who are new to the stock market often get confused by the term moat. This is because moat is not easily defined and cannot be quantified based on numbers alone. Looking a little deeper into the origins of the word for better understanding, it seems that the term came into wider use in the finance world through Warren Buffett, the legendary value investor who is worth more than $118 billion. Buffett, famous for shrewd investments in the value space, used it to define companies that have sustainable competitive advantages over peers in the marketplace.
Although Buffett likes to invest in companies with wide moats, as he calls them, the term moat has been modified in recent years to also include companies with narrow moats. The distinction between wide and narrow moats is interesting. Companies with wide moats provide goods or services that are similar to those offered by competitors, but widely outperform their peers in terms of profits. Not only are these firms ahead in terms of profits, but they can also protect these and their market share in the long-term.
In contrast, the companies with narrow moats are somewhat similar to those with wide moats in that they outperform peers in terms of profits, but their outperformance is usually understood to be not long-term or is even time-limited in some cases. Some examples of companies with narrow moats that hedge funds are buying include DoorDash, Inc. (NYSE:DASH), Expedia Group, Inc. (NASDAQ:EXPE), and The Bank of New York Mellon Corporation (NYSE:BK), among others discussed in detail below.
It is important to clarify that companies with narrow moats often operate in economic sectors that have tight margins, license protection, and low barriers to entry. These factors make the competitive advantage they gain over peers all the more impressive given the constraints under which these firms usually operate. The business acumen of firms with narrow moats is better understood in context of the third quarter earnings call of DoorDash, Inc. (NYSE:DASH), a logistics platform that connects merchants with consumers.
Tony Xu, the CEO of DoorDash, Inc. (NYSE:DASH), in response to a question by Barclays analyst Ross Sandler during the third quarter earnings call, said that the company had a long-term strategy in place to grow internationally by working in partnership with businesses that had world-class retention and order frequency. The CEO underlined that the firm also looked to invest, in a concentrated manner, only in businesses that had excellent execution, allowing growth at multiple levels and geographies.
“I mean you’re absolutely right. We are very excited about our execution on the international front. We continue to grow at multiples of what we see around the world, virtually across any geography. That doesn’t mean that we are pleased yet with where our product is.
We still have a lot of room left to go. But I think it does stem from why our outperformance has occurred, which is I think the hallmarks at any great marketplace have the fundamental characteristics of great retention order frequency and unit economics. And I think when you look at our international business or our new categories business or a restaurant business, you see all of these characteristics present. And that’s why we’ve been very interested in leaning in and making the investments that we have at size, at scale, because of what we see.
And the international business continues to see those points of execution. I think if we remind ourselves even a couple of years ago of the investment thesis behind our partnership with Wolt, it really centered on two big pieces. One of which was here is a business that has leading world-class retention and order frequency, and the question is, can we invest behind that in a concentrated way and hopefully add to the excellent execution that they’ve already seen. And so far, the answer has been yes to that.”
Our Methodology
The companies that have short-term advantages over competitors were identified using manual research and Reddit threads. The top ones were then ranked according to hedge fund sentiment. Data from around 900 elite hedge funds tracked by Insider Monkey in the third quarter of 2023 was used to identify the number of hedge funds that hold stakes in each firm. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). That’s why we pay very close attention to this often-ignored indicator.
A portfolio manager in front of their computer screen, evaluating a variety of mid-cap stocks.
Narrow Moat Stocks Hedge Funds Are Buying
10. Live Nation Entertainment, Inc. (NYSE:LYV)
Number of Hedge Fund Holders: 40
Live Nation Entertainment, Inc. (NYSE:LYV) operates as a live entertainment company. On December 14, investment advisory Morgan Stanley upgraded Live Nation Entertainment, Inc. (NYSE:LYV) stock to Overweight from Equal Weight and raised the price target to $110 from $100.
At the end of the third quarter of 2023, 40 hedge funds in the database of Insider Monkey held stakes worth $2 billion in Live Nation Entertainment, Inc. (NYSE:LYV), compared to 41 in the preceding quarter worth $2.2 billion.
Just like DoorDash, Inc. (NYSE:DASH), Expedia Group, Inc. (NASDAQ:EXPE), and The Bank of New York Mellon Corporation (NYSE:BK), Live Nation Entertainment, Inc. (NYSE:LYV) is one of the narrow moat stocks hedge funds are buying.
In its Q3 2023 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and Live Nation Entertainment, Inc. (NYSE:LYV) was one of them. Here is what the fund said:
“Liberty Media Corporation-Liberty Live is a tracking stock created on 8/4/2023 representing Liberty Media Corporation’s holdings in Live Nation Entertainment, Inc. (NYSE:LYV) shares. Those holdings were previously attributed to Liberty SiriusXM and reattributed to a the newly created Liberty Live Group vehicle to reduce the complexity of the Liberty SiriusXM structure and make way for its potential combination with the underlying SiriusXM business. We believe the separation created some selling pressure on Liberty Live, creating an attractive discount of over 40% to the underlying value of its Live Nation holdings, and we took advantage of that discount to build a position. The Liberty Live Group is a small-cap vehicle through which we can own the underlying Live Nation business, which we have tracked and liked for years. Live Nation has significant competitive advantages in the live entertainment industry due to its unique combination of concert promotion, ticketing, venue management, and sponsorship businesses, which create a market share flywheel and margin structure that is difficult for competitors in any one of these underlying sub-segments to replicate independently. In addition to the upside we see in Live Nation, we think Liberty Live Group could eventually transition from a tracking stock to an asset-backed vehicle, which would pave the way for a structure consolidation with Live Nation and allow us to capture the current wide NAV discount.”
9. Tapestry, Inc. (NYSE:TPR)
Number of Hedge Fund Holders: 41
Tapestry, Inc. (NYSE:TPR) provides luxury accessories and branded lifestyle products in the United States, Japan, Greater China, and internationally. On November 13, investment advisory JPMorgan maintained an Overweight rating on Tapestry, Inc. (NYSE:TPR) stock and lowered the price target to $41 from $56.
At the end of the third quarter of 2023, 41 hedge funds in the database of Insider Monkey held stakes worth $373 million in Tapestry, Inc. (NYSE:TPR), compared to 40 in the preceding quarter worth $467 million.
8. SS&C Technologies Holdings, Inc. (NASDAQ:SSNC)
Number of Hedge Fund Holders: 43
SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) provides software products and related services. On November 7, investment advisory UBS initiated coverage of SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) stock with a Buy rating and a price target of $72.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Pzena Investment Management is a leading shareholder in SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) with 14 million shares worth more than $747 million.
In its Q3 2023 investor letter, Diamond Hill Capital, an asset management firm, highlighted a few stocks and SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) was one of them. Here is what the fund said:
“Our bottom contributors in Q3 were all from our long book, including HCA Healthcare and SS&C Technologies Holdings, Inc. (NASDAQ:SSNC). SS&C Technologies, a provider of software and services to investment firms, brokerages and other financial institutions, has faced slower organic growth in recent quarters as its business units have produced inconsistent results. Further, rising costs have crimped margins — issues we believe will eventually stabilize but which we are monitoring closely. However, we believe the market is overly pessimistic about the company’s ability to improve its organic growth rate and its margins and are maintaining our position.”
7. Charles River Laboratories International, Inc. (NYSE:CRL)
Number of Hedge Fund Holders:
Charles River Laboratories International, Inc. (NYSE:CRL) provides drug discovery, non-clinical development, and safety testing services. On November 10, investment advisory Wells Fargo maintained an Overweight rating on Charles River Laboratories International, Inc. (NYSE:CRL) stock and lowered the price target to $250 from $275.
At the end of the third quarter of 2023, 47 hedge funds in the database of Insider Monkey held stakes worth $786 million in Charles River Laboratories International, Inc. (NYSE:CRL), compared to 42 in the preceding quarter worth $745 million.
6. Palantir Technologies Inc. (NYSE:PLTR)
Number of Hedge Fund Holders: 31
Palantir Technologies Inc. (NYSE:PLTR) builds and deploys software platforms for the intelligence community in the United States. On November 2, investment advisory Goldman Sachs maintained a Neutral rating on Palantir Technologies Inc. (NYSE:PLTR) stock and raised the price target to $12 from $11.
At the end of the third quarter of 2023, 31 hedge funds in the database of Insider Monkey held stakes worth $1 billion in Palantir Technologies Inc. (NYSE:PLTR), compared to 39 in the previous quarter worth $987 million.
Just like DoorDash, Inc. (NYSE:DASH), Expedia Group, Inc. (NASDAQ:EXPE), and The Bank of New York Mellon Corporation (NYSE:BK), Palantir Technologies Inc. (NYSE:PLTR) is one of the narrow moat stocks hedge funds are buying.
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Disclosure. None. 10 Narrow Moat Stocks Hedge Funds Are Buying is originally published on Insider Monkey.