My favourite investing strategy is searching for growth shares to buy. Alongside any potential for growth, I also want the company to have an economic moat. The way I check for this is to look for evidence of a competitive advantage.
With this in mind, here are two growth shares with economic moats that I’d buy for my portfolio. They represent two of the best growth shares in the UK today in my view.
A FTSE 100 share to buy
The first company is London Stock Exchange (LSE: LSEG). I consider it as having an extremely strong economic moat due to its near-monopoly over the stock exchange industry in the UK.
So, why has the company got such a big competitive advantage? Well, it already has a large number of big-name companies listed on its exchange. There would be little need for companies to list elsewhere now that they trade successfully on the London Stock Exchange. It’s what I would call a significant ‘switching cost’. This is when a customer (here a public company) wouldn’t go to the effort of switching providers (to a new stock exchange). A switching cost can be monetary, or simply mean there’s just too much effort involved for little benefit.
London Stock Exchange’s profit before tax is expected to grow by 15% in 2022 according to consensus forecasts. This is an attractive growth rate for my portfolio. It would lead to attractive returns as a long-term investment if it can be maintained.
There is a key risk to consider though. London Stock Exchange acquired the financial data company Refinitiv last year. It then guided for increased costs associated with the integration. There’s no guarantee this acquisition will be a success, and costs may rise further. However, if this works out, the company’s economic moat may even widen. I think this is likely, so the stock is a strong buy for my portfolio.
Looking in the FTSE 250
I also view Games Workshop (LSE: GAW) as having an excellent economic moat. In this case, it has an intangible asset base that gives it a competitive advantage.
As a quick recap, Games Workshop is a designer and manufacture of miniature models that are used in a wide array of tabletop games. Hobbyists spend time painting their models, and then battling them against other players.
Games Workshop has spent decades developing the fantasy worlds associated with its miniatures. This has created the substantial intangible asset base that would be very difficult for a competitor to emulate. As such, it’s not just the quality of the miniatures themselves, but the years of evolving rules and stories that come with them that attract and retain a fanbase.
The company is now also building licensing revenue based on its intangible assets. It’s able to sell the rights to use its characters to video games developers. This is very high-margin business for the company, and something I believe will grow significantly from here.
There’s no guarantee that Games Workshop will stay popular in the years ahead though. Potential competition from virtual reality, a new video game, or a competitor in its core field may erode the profits of the company as fans look elsewhere. However, I still consider the shares a buy today for my portfolio.
Dan Appleby owns shares of London Stock Exchange and Games Workshop. The Motley Fool UK has recommended Games Workshop. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
