The retail environment is difficult for Tesco (LSE: TSCO). Along with rivals Morrison’s and Sainsbury’s, it is slashing prices to keep up with Aldi and Lidl.
As fellow Fool Edward Sheldon points out, Tesco is a company that divides opinion. Some people think it’s turned a corner, while others aren’t so sure.
My concerns are that I believe Tesco has lost its competitive moat. Everywhere I go, I notice a new Aldi and Lidl stores opening.
And then you read about the 4,500 redundancies announced at Tesco in August. I think it’s quite clear that the company is on unstable footing. Prices will probably be cut until it has regained its market share.
When it comes to buying shares, one of the requirements I look for is that companies are well moated. I think these two businesses tick that box:
Rightmove
If you’ve bought or rented a property in the past few years, you’ve probably used Rightmove (LSE: RMV) to assist in your search.
Usually, I steer away from technology stocks, as I feel there is always a new entrant looking to step into the market and disrupt it. Having said that, I believe Rightmove is synonymous with the property industry, and competitors will find it incredibly difficult to take away a significant chunk of its market share.
With its share price growing over 40% in a year – making the price-to-earnings ratio an eye-watering 33 – and a prospective dividend yield of just 1%, this is not a bargain stock. But in situations like this, I recall Warren Buffett’s advice that “it’s better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”
I feel the high valuation is justified in this instance, as clearly Rightmove is the dominant player in the market.
Reckitt Benckiser
When it comes to moated companies, nothing beats a low-cost consumable product. Brand loyalty is such that even in hard times, customers won’t sacrifice a pound or two for an own-branded imitation.
Reckitt Benckiser (LSE: RB) has a strong portfolio of products under three umbrellas: hygiene, home, and health. The company’s brands include familiar names such as Gaviscon, Durex, Nurofen, Dettol, and Harpic.
Reckitt Benckiser has begun its ‘RB 2.0’ plan, in which it aims to separate the hygiene, health, and home portfolios.
Its most recent results for the last quarter were disappointing for investors, due to weaker than expected sales growth in markets such as the US and China. Like-for-like sales growth in Q3 was just 1.6%.
As such, its share price has dropped roughly 10% in a year, meaning the price-to-earnings ratio is 17. The prospective dividend yield for the company is 2.5%.
It’s not unreasonable to think this may be a problem for the company in the short-term. But for a long-term investor, I believe this presents a buying opportunity.
