What Does a Competitive Moat Mean?

If you’re new to trading or investing, you might have heard the term “moat” being used when discussing companies, but what does it actually mean?

A moat refers to a company’s sustainable competitive advantage, something that protects it from competitors and allows it to maintain market dominance, pricing power, and profitability over time.

Where Does the Word "Moat" Come From?

The term "moat" comes from medieval castles. A moat was a deep, wide ditch - often filled with water - surrounding a castle to protect it from attackers. The bigger and stronger the moat, the harder it was for enemies to breach the castle.

In business, a company with a strong moat is like a well-protected castle; it has barriers that keep competitors from easily taking its market share.

Why Are Moats Important in Investing?

Companies with strong moats can:

• Defend against competitors (harder to lose market share)
• Maintain strong pricing power (can charge premium prices)
• Generate consistent profits (steady revenue even in downturns)
• Deliver long-term growth (good for long-term investors)

Types of Moats (Competitive Advantages)

Here are some common types of moats:

Brand Power

A strong reputation makes customers loyal (e.g., Coca-Cola – people buy Coke because of its brand, even with cheaper alternatives).

Network Effect

More users make the service better (e.g., Visa – the more businesses accept Visa, the harder it is for competitors to break in).

Switching Costs

It’s expensive or difficult for customers to switch (e.g., Apple – once you own an iPhone, Mac, and Apple Watch, switching to another brand is a hassle).

Cost Advantage

Producing at lower costs than competitors (e.g., Walmart – buys in massive bulk, keeping prices lower than rivals).

Patents & Legal Protection

Exclusive rights to products or technology (e.g., Pfizer – patents on drugs give it a monopoly for years).

Why You Should Care About Moats

If you’re an investor, moats matter because they help identify stocks with long-term potential.

While short-term price movements are driven by news, earnings, and trends, strong moat companies tend to recover well from downturns and keep growing over time.

Visa’s Competitive Advantage (Moat): Network Effect & Brand Trust

A great example of a strong competitive advantage (moat) is Visa (V) and its global payment network.

Visa operates the world's largest electronic payment network, processing trillions of dollars in transactions annually. Its competitive moat comes from its network effect, brand dominance, and scalability.

Network Effect

Visa’s vast payment network includes millions of merchants and financial institutions worldwide. The more businesses accept Visa, the more consumers use it, creating a self-reinforcing cycle that makes it hard for new competitors to break in.

High Barriers to Entry

Building a global payment infrastructure requires massive capital investment, regulatory approvals, and merchant adoption, making it nearly impossible for new entrants to challenge Visa at scale.

Brand Trust & Ubiquity

Visa is one of the most recognized and trusted financial brands worldwide. Consumers and businesses rely on Visa for secure, instant, and global transactions, making it a go-to choice over lesser-known alternatives.

Asset-Light, High-Profit Model

Unlike banks, Visa doesn’t take on credit risk, it simply processes transactions, earning a fee every time someone swipes their Visa card. This capital-light model allows Visa to scale profitably with high margins, even in economic downturns.

The Result?

Competing with Visa is nearly impossible because of its established infrastructure, deep market penetration, and trust among merchants and consumers.

Even as fintech disruptors emerge, many rely on Visa’s infrastructure rather than replacing it.

This gives Visa pricing power, steady revenue growth, and resilience in downturns, hallmarks of a durable competitive advantage.

How to Screen for Companies with Strong Moats?

While stock screeners don’t have a direct "moat" filter, you can focus on companies with strong competitive advantages by combining fundamental and technical filters.

This is how it's done in ChartMill:

Financial Strength & Profitability Filters (Fundamental Analysis)

• High Return on Equity (ROE) ≥ 15% → Strong profitability, efficient use of capital

• High Return on Invested Capital (ROIC) ≥ 12% → Indicates sustainable competitive advantage

• Stable or Increasing Gross Margins (≥ 40%) → Suggests pricing power

• Operating Margin ≥ 20% → Companies with strong moats often have high efficiency

• Low Debt-to-Equity (D/E ≤ 1) → Financial stability; avoids companies that rely too much on debt

ChartMill Results: US only list - EU only list

Revenue & Earnings Growth (Competitive Strength)

• Revenue Growth (5Y) ≥ 10% → Consistent growth indicates strong demand

• Earnings Per Share (EPS) Growth (5Y) ≥ 10% → Shows profitability is increasing over time

• Free Cash Flow Positive FCF Yield ≥ 1 → Companies generating real cash, not just accounting profits

ChartMill Results: US only list - EU only list

Market Leadership (Brand & Pricing Power Indicators)

• Large-Cap or Mega-Cap Stocks (Market Cap ≥ $10B) → Moat stocks tend to be industry leaders

• High Institutional Ownership (≥ 70%) → Smart money backs the company, indicating confidence

• Low Short Interest (≤ 5%) → Indicates market confidence in the company’s long-term strength

ChartMill Results: US only list - (Short interest not available for EU stocks)

The Competitive Moat Basic List

This is a direct link to the US stocks that meet all the criteria listed above

Conclusion

Understanding competitive moats is essential for any investor looking to build a strong portfolio.

Companies with sustainable advantages - whether through brand power, network effects, high switching costs, cost efficiency, or legal protections - are better positioned to outperform the market over the long term.

These firms can maintain pricing power, generate steady profits, and defend their market share even in economic downturns.

By using fundamental screening criteria such as high ROE, strong margins, consistent growth, and market leadership, investors can identify businesses with durable moats.

While no investment is risk-free, focusing on moat stocks helps ensure that you are investing in companies with long-term staying power.

IIf you're interested in finding high-quality stocks with strong moats, use the ChartMill screening links provided to start your search. However, it’s important to remember that the stocks identified by this moat screen should not be considered direct recommendations to buy.

Instead, treat them as a high-quality initial shortlist of great companies. Always conduct your own further research and due diligence to determine if a particular investment aligns with your personal goals, risk tolerance, and investment strategy.