Mega-trends don't make you rich: Why moats matter in investing

A company could play in the most exciting growth field in the history of man, but it could still be a poor investment.

There are many Australians who invest in ASX shares on the basis that the businesses are on the right side of massive trends.

These could be themes like lithium production, electric vehicles, or the ageing population.

But one expert has warned that investing in mega-trends is a trap that could lose you significant amounts of money.

US financial expert and buy-and-hold advocate Brian Feroldi took the example of meat substitutes as an example in his newsletter.

"Last year, global sales of plant-based meat rose 31% to more than $10 billion, according to Statista. Over the next five years, that figure is expected to triple," he said.

"This is clearly a mega-trend in the making."

However, the winners from such explosive growth aren't always investors.

"In the case of plant-based meat, consumers and society are most likely to reap the bulk of the rewards," said Feroldi.

"That's because we don't see any discernible moat — or sustainable competitive advantage — for the largest players."

Businessman at the beach building a wall around his sandcastle, signifying protecting his business.

Image source: Getty Images

The fake meat business is booming, but are investors cashing in?

Take a look at one of the pioneers, Beyond Meat Inc (NASDAQ: BYND).

As a first-mover in the industry, investors went crazy for the shares after the company listed in 2019. Within the first few months, the share price went from the US$60s to the US$230s. 

This is the sustainable future in a world craving better health and feeding a massive population, thought shareholders.

And that sentiment is still likely true, with more and more people consuming meat substitutes each year.

But now the Beyond Meat stock price is languishing around US$16.

Why? Because larger, deep-pocketed competitors joined the plant-based meat market when they saw how lucrative the business is.

"Scores of rivals like Tyson Foods Inc (NYSE: TSN), Kraft Heinz Co (NASDAQ: KHC), and Conagra Brands Inc (NYSE: CAG) have started offering plant-based meats of their own at cheaper prices," said Feroldi.

"When that happens, gross margins — the price a burger sells for minus what it cost to make — contract."

Feroldi presented the deterioration in Beyond Margin's gross margins in black-and-white:

YearBeyond Meat's gross margin
201933.5%
202030%
202125.2%
2022(6.2%)
Source: Long-Term Mindset newsletter

"That's right, the company has been forced to slash prices so much it is losing money with each sale."

And that's why a business' moat matters much more than trends.

A company could be in the most exciting growth field in the history of humankind, but if everyone else can easily pile on then investors will lose.

"Before you run out [and] invest in the next mega-trend, ask yourself: what's this company's moat?" said Feroldi.

"Without that moat protecting profits, it's just a matter of time before competitors show up to drive down prices. And when that happens, it is consumers — not investors — that stand to benefit the most."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Beyond Meat. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Kraft Heinz. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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