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Sector Sovereignty: Exploring the Reign of Moat Stocks by Investing Sector

As a curious fellow, at the end of each year I run through an exercise with the Russell 1000 Index. The numbers you see below are as of 12/29/2023. There are two points to conducting this exercise. The first point is to see if the best stocks over the last 10 years have been ones with moats. The second point is to debunk the marketing from many large financial firms. The marketing is a question – “Why take single stock risk when you could own the whole sector?” The marketing is for a family of exchange-traded funds that would rather see you put your money in their funds (that hold good and bad companies) than investing in a handful of solid companies. In reality, investors have more than two choices. For one, you could buy the best companies in each sector and leave the trash behind.

So, what are the logistics of my exercise? The first screen is to remove any stock that has not been publicly traded for at least 10 years. Granted, there are plenty of great companies that have come about or gone public in the last 10 years. As a long-term investor I’m looking for performance over time. I’m sure many of the companies that get screened out are worthy investments. Heck, I own some of them. I also exclude the utilities sector as I have no interest in those companies as investments. A few important items:

  • Each chart has a peach colored section with the S&P 500 total return numbers and the respective sector’s total return numbers.
  • A small “M” next to a stock means it’s a moat company in my research universe that I actively track.
  • A small grey check mark means it is a moat company but not one I actively track. Nonetheless, it is a stock with a moat.
  • I will provide my observations/commentary under each chart.
  • Spoiler alert – it pays to own the cream of the crop stocks instead of the laggard, mediocre-performing sector ETFs. It appears that the conventional wisdom of not taking the risk of owning a small number of stocks in a sector is wrong.

Here are the results of the 10 best performing stocks in each sector over the last 10 years.

Consumer Staples

One would not have had to look too far to outperform the consumer staple sector ETF by holding a few well known moat companies like COST, TGT and PEP.

Consumer Discretionary

Yes there are some surprising companies in this small list but, owning a handful of these stocks versus the index would have proven to be better than the sector index.

Financials

You will note the absence of any of the mega financial firms like banks, insurance companies or brokerage houses. What you do have are the companies that are the backbones of the big financial houses. Credit card network Mastercard, research company and bond rating S&P Global.

Technology

The tech chart speaks for itself. One of the easier places to establish a moat but hardest to maintain. If you find a company that has a moat and successfully defends it you have found something worth considering. Looks like the sector ETF was a laggard.

Industrials

Again industrial company moats are hard to breach as the cost to compete is high. The reward to investors in these companies versus investors of the sector indexes has been huge.

Basic Materials

Similar to industrials, basic material companies often have scale and cost advantages that hold for long periods of time.

Communications

The communications sector is relatively new. Most of these companies were categorized as tech for a long time. So, this chart is not quite as useful as all the others. Yet, you can still see how much the stocks have trounced the S&P 500.

Healthcare

Again, one of the easier places to carve a moat thanks to IP. This is one where it Paid handsomely to find a few stocks worth owning and not the laggard sector index.

Real Estate

Real estate is one area where a moat is hard to establish let alone maintain. Nonetheless, a few of these companies would have done your portfolio a solid.

Energy

Hess corp was gobbled up by Chevron in 2023 which was just below EOG resources on this list.

This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

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