The top 10 ASX 100 companies with moats, according to MarketMeter

Finding Quality stocks with pricing power has been a key goal for many investors in the last couple of years. And for management teams, the ability to pass on rising costs has been further magnified in importance since inflation hit the scene again in early ’22.

High-quality companies with pricing power – those that are price makers rather than price takers – are usually regarded more favourably than lower-quality companies during inflationary periods.

Why? Because the costs of doing business rise in such environments. Companies that can pass on these higher prices to their customers – rather than absorbing them on their balance sheets – have an inherent advantage.

Australia’s third-largest company (by market cap), biotechnology firm CSL Limited (ASX: CSL) ticks these boxes, a Quality stock whose mature blood plasma and vaccines businesses hold strong market share and enduring investor appeal.

CSL ranks among the top tier of ASX 100 companies captured in MarketMeter’s second-half 2022 research. Two other names in the healthcare sector also made the ASX 100 list, alongside three in communications and technology and others across financials, industrials, real estate and consumer discretionary.

What is Sustainable Competitive Advantage?

Pricing power is usually an underpinning attribute of companies with an even bigger edge: Sustainable Competitive Advantage. This is one of 27 factors market insights firm MarketMeter tracks in its stock-scoring research. This is drawn from 130 Australian institutional data providers, which include leading super funds, asset managers and sell-side financial institutions.

Relating to the market positioning of companies, Sustainable Competitive Advantage is sometimes referred to as an “economic moat” (as coined by Warren Buffett decades ago). It’s often underpinned by:

• Strong bargaining power with suppliers,
• Quality products or services, and
• High market share.

What is MarketMeter?

Using a combination of quantitative and qualitative research (in other words, both numbers-based and non-numerical) insights, MarketMeter helps gauge the sentiment of professional investors.

“That sentiment will ultimately affect a company’s share price, depending on what area of the company we’re talking about,” says Nicholas Coles, managing director and co-founder at MarketMeter.

As one of the factors within the firm’s Strategy Category, alongside Growth Prospects, there’s considerable crossover in the companies identified within the two factors of MarketMeter’s latest research - for 2H 2022.

“And that’s to be expected because if you’ve got a sustainable competitive advantage, you’ve probably also got a great ability to grow your business,” Coles says.

But as the companies listed below highlight, there are anomalies. For example, REA Group (ASX: REA), Wesfarmers (ASX: WES) and Wisetech Global (ASX: WTC) made these lists, they're not among those that emerged from the Growth Prospects category for 2H 2022.

“They’ve got the moat but not necessarily the growth prospects, at least in the eyes of the fund managers who scored the companies - there must be a reason for that perception,” Coles says.

The MarketMeter platform enables institutions to score companies from 1-10 on a range of factors. Participants are then able to see how their views compare to those of other professional investors.

In this series, we’ve selected six MarketMeter factors that we think Livewire readers will be most interested to learn more about. My colleague Chris Conway kicked off with Sustainability Reporting, which falls under the ESG category group. And Hans Lee followed up with his wire on the Investment Desirability metric, part of the Financial Category.

In the following wire, I outline the top 10 stocks for each of the ASX 100 and ASX 101-200 categories, in terms of Sustainable Competitive Advantage. I also include insights gathered from Kyle Macintyre, investment director and chief operating officer, Firetrail Investments.

Top 10 ASX 100 companies with Sustainable Competitive Advantages

These are the ASX 100 companies that fund managers scored highest with regard to their bargaining power with suppliers, quality of their products and/or services, and market share. The list appears in order based on the results of the most recent MarketMeter research.

• Macquarie Group Limited (ASX: MQG)
• CSL Limited (ASX: CSL)
• Transurban Group (ASX: TCL)
• Xero Limited (ASX: XRO)
• REA Group (ASX: REA)
• Fisher & Paykel Healthcare (ASX: FPH)
• Wesfarmers Limited (ASX: WES)
• Wisetech Global (ASX: WTC)
• Goodman Group (ASX: GMG)
• ResMed Inc. (ASX: RMD).

Top 10 ASX 101-200 companies with Sustainable Competitive Advantages

These are the ASX 101-200 companies that fund managers scored highest with regard to their bargaining power with suppliers, quality of their products and/or services, and market share. The list appears in order based on the results of the most recent MarketMeter research.

• Chalice Mining (ASX: CHN)
• Liontown Resources (ASX: LTR)
• Lovisa Holdings (ASX: LOV)
• Bapcor Limited (ASX: BAP)
• Arena REIT (ASX: ARF)
• Chorus Limited (ASX: CNU)
• Breville Group Limited (ASX: BRG)
• Corporate Travel Management (ASX: CTD)
• HUB24 (ASX: HUB)
• Telix Pharmaceuticals (ASX: TLX).

KYLE MACINTYRE, FIRETRAIL INVESTMENTS

What did you think of the lists, generally?

"There are many high-quality companies on the list. In the current market environment, we’re attracted to businesses with resilient earnings, and which are trading at compelling valuations – such as ResMed and CSL," Macintyre says.

"But the key questions investors need to ask are “Am I paying a fair price?” and “How resilient will earnings be in an economic slowdown?” These are particularly relevant in our higher interest rate environment."

What companies (that aren’t already represented here) do you think should have made the list?

"Two companies that stand out as having strong competitive advantages would be Seek (ASX: SEK) and James Hardie (ASX: JHX). Both are market leaders with strong competitive positions and pricing power," says Macintyre.

"Most importantly, both businesses have been sold off on concerns around economic conditions. This has created what we believe is an attractive opportunity to buy high-quality businesses at compelling valuations."

How is analysis of the fundamental growth (of earnings, revenue etc) used in your overall stock selection process?

"Our philosophy is that 'every company has a price.' In other words, any company can outperform – whether it’s Value, Growth, Cyclical, or Defensive. The key is the price you pay. If you overpay for growth, it can turn out to be a poor investment," says Macintyre.

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The top 10 ASX 100 companies in terms of Growth Prospects, according to MarketMeter

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