Our research is not theory-based, but results-based. Our track record of the many recommendations we’ve made provide clear proof of our results. This allows (and has allowed) our subscribers to gain early access and warning signals about various companies or resource investments, typically about 3 to 12 months in advance. The key is to identify critical inflection points – or lack thereof one – in industries and companies that cannot be seen with traditional research systems and rankings.

What’s behind the power of the wRatings system? Our ratings are based on the only true leading indicator to superior financial performance: the ability of a company to deliver on the NEXT set of customer expectations. We measure these expectations in the form of moats, or barriers to entry that companies build in order to protect the consumer advantages translating into economic advantages.

In general, a company’s Total Moats (TM) are a leading indicator to their ability to generate superior economic profit (EP) in the future, as shown in the chart here. As a group, companies able to sustain a high TM score (in the top quintile, which is at the 80th percentile or above) have historically generated the highest EP in thatsame year. The key is that we can see every company’s Total Moat score in advance of their economic profit, thus allowing our Premium Subscribers to know how well each company is forecasted to perform.

A company’s TM score has become a bellwether to revisions in a company’s expectations within a given quarter. Some companies are able retain a level of momentum due to their past performance, meaning a low TM must become persistent in order to lower EP. Said another way, Total Moats act as an early warning signal to a company that they must improve their performance or risk becoming less competitive, and subsequently, less profitable. TM help you understand those inflection points in a company’s performance.

To determine the use of consumer moats as a leading indicator to competitive advantage, we back test our ratings on an annual basis. Specifically, we examine the Total Moat scores (a sum of the 9 individual moat ratings) for a company in a given year. After the year concludes, we add each company's economic profit (ROIC minus WACC) from the SEC Edgar database to our Moat Maker™ database.


THE ORIGINAL COMPETITIVE ADVANTAGE STUDY

Some companies seem to figure out ways to continually beat their competitors, holding onto or increasing their market share and generating consistently high ROIC (return on invested capital) over long periods of time.  How can these companies do that, even though they are not the largest, the most recognized brands or even have the “hottest” product?

THE BENCHMARKS
There are three often disparate sources of information for a large number of market-leading companies: financials, consumer expectations and company performance metrics on how well they delivered against those expectations in comparison to their competitors.  We started with 2,628 market leading companies across six sectors of the US economy, paring the list down to only those generating revenue in excess of $100 million or market caps in excess of $1 billion and also have consumer awareness.

Using the 300+ companies remaining, we needed a set of benchmarks that properly identify those firms having built a true competitive advantage within their industry.  Two telltale signs confirm the existence of competitive advantage from a financial perspective: 1) Stable or increasing market share within their industry, and 2) High returns on invested capital (ROIC).

THE MOATS
Basic economic theory shows that in a highly competitive market, returns will be driven down to essentially “no economic profit” as rivals will imitate any advantage. As the universe of competitors continually changes or grows, the ability to develop an economic advantage is significantly more difficult.  In today’s world, the key is to create barriers to entry—or what investment guru Warren Buffet calls moats—which prevent competitors from taking away profits.  Companies with moats reward their shareholders with sustainable profit levels over time.

After sifting through all the data, the team discovered three common ways to create and build competitive advantage to protects profits and grow revenue.  These barriers to entry can be built in only one of three business areas: 1) Supply Chain, 2) Products, and 3) Delivery Chain.  Within each area, our research team identified three unique moats, or nine total, that companies employ to build competitive advantage.

THE RESULTS
To determine the use of consumer moats as a leading indicator to competitive advantage, we backtest our ratings on an annual basis.

Specifically, we examine the Total Moat scores (a sum of the 9 individual moat ratings) for a company in a given year. After the year concludes, we add each company's economic profit (ROIC minus WACC) from the SEC Edgar database to our Moat Maker™ database. We then compare multiple points of percentile ranks versus economic profit.

Because we publish our scores in advance of a company's end of year financial results, Total Moat scores are a leading indicator of a company's economic profit over the long term. The general rule can translate to examples of specific companies over time.