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Long-term stock trading strategy: Four indicators to help you uncover companies with economic moats

by , 23 July 2014

When selecting stocks for your long-term portfolio, you want to buy companies that are solid and resilient.

You want to buy these stocks, tuck them away, watch the share price grow and rake in your dividends over the years.

So what's the best way to do this?

You need to look for companies with strong economic moats. These ‘moats' give these companies staying power and the ability to win the battle against competitors

Read on to uncover four ways to apply this stock trading strategy to your share picks…

Economic moat indicator #1: Look for strong and consistent ROCE

ROCE is return on capital employed. It’s a valuable tool to use in your stock trading strategy.

If you can find a company that has a high ROCE over many years, you could be on to a great investment. You can read more about using ROCE here.

Economic moat indicator #2: Look for a strong brand

Branded products can hold the key to a company’s future success, Phil Oakley in Money Week explains. Think about how you buy branded products and don’t deviate from them.

This is great news for a business. A loyal customer base who will continue to buy the product again and again.

The stronger the brand, the higher the chance of the company doing well into the future.

Economic moat indicator #3: Look for patent protected products

This primary relates to the pharmaceutical industry and the technology sector. Patents don’t last forever, but they definitely give the company the upper hand.

These companies might put a lot of money into research and development of their products, but if successful, the business will reap the benefits for years to come.

Economic moat indicator #4: Look for large companies

The larger a company, the more it can benefit from cost savings. It can negotiate the best deals with its suppliers and service providers.

This gives the company an edge over its rivals as it can keep costs down.

Buying companies with economic moats

The hard part of investing in companies with economic moats is buying them at a reasonable price. These companies are in demand and their share prices tend to reflect that.

You need to be patient when it comes to investing in these shares. Compile a watch list of the stocks that meet your criteria and wait.

Watch for temporary pullbacks in the company’s share price and pounce.

So there you have it, four indicators to help you uncover companies with economic moats.

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Long-term stock trading strategy: Four indicators to help you uncover companies with economic moats
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