What is the Quantitative Economic Moat for stocks?
The concept of the 'economic moat' or competitiveness or competitive advantage is essential, not only in Morningstar’s qualitative determination of the attractiveness to invest in a company, but also in the valuation process. Morningstar uses three evaluations of this competitive advantage: none, narrow and wide.
There are two important conditions for a company to obtain a narrow or wide evaluation of its competitiveness. First of all, the prospect of obtaining a more than average yield on capital and secondly a competitive advantage that protects and sustains this yield in the long term.
Competition usually lowers the profit. But companies that are able to sustain their profit over a long period because they have been able to create a competitive advantage, have a 'moat'. We consider these companies superior investments.