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.

| More on:
Businessman at the beach building a wall around his sandcastle, signifying protecting his business.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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."

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
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.

More on Opinions

golden egg in a nest representing a SMSF investment

3 stocks I'd buy and hold inside a self-managed superannuation fund

These shares are some of my best picks for an SMSF investor.

Read more »

A young man talks tech on his phone while looking at a laptop. A financial graph is superimposed across the image.

Where I'd invest $10,000 right now in ASX 200 shares

I would invest in these stocks in a heartbeat.

Read more »

A young boy sits on his father's shoulders as they flex their muscles at sunrise on a beach
Growth Shares

I'd buy these great ASX growth shares in March

Growth stocks could achieve strong returns.

Read more »

A woman sits in front of a computer and does some calculations.
Technology Shares

Tech treasures: 2 undervalued ASX software stocks to watch in 2024

I think it’s a good time to look at these tech names.

Read more »

A man in his 30s with a clipped beard sits at his laptop on a desk with one finger to the side of his face and his chin resting on his thumb as he looks concerned while staring at his computer screen.

The pros and cons of buying the Vanguard US Total Market Shares Index ETF (VTS)

There are both positives and negatives to this ETF.

Read more »

A young woman makes an online travel booking as she sits on some steps with her suitcase next to her.

I think this ASX small-cap share can soar in 2024

This stock could keep travelling higher over time.

Read more »

View from below of a man with a shovel standing by a hole he has dug in the garden, with blue sky in the background.
Resources Shares

Here's why I'm steering clear of Core Lithium shares

Lithium has bottomed out over the past year, but here's why this is NOT the bargain stock to buy.

Read more »

A happy older couple relax in a hammock together as they think about enjoying life with a passive income stream.
Investing Strategies

I'd aim to turn a $20,000 savings account into $25,400 of passive income

It doesn't matter if you don't have a pile of cash to start investing. The important thing is to start.

Read more »