The Misfits: Plexus Corp (PLXS)

Not every great investment has an economic moat (in the conventional sense)

View of Delft, Johannes Vermeer, circa 1660, oil on canvas

Investors and financial writers give a lot of attention to economic moats. A company having a strong or impenetrable moat is often a shorthand sign for a quality that will likely stand the test of time.

The got take, get noticed on TV take would be to say that economic moats don’t matter (apologies to Todd Wenning at Flyover Stocks who has done some excellent work on economic moats and why they matter). The more subtle, nuanced opinion is that identifying moats is a great way to introduce investors to critically analyzing businesses and developing a business-first, bottom-up investing thesis.

That said, the economic moat isn’t the determining factor for a worthy investment.

Take, for example, the giant telecom companies: Verizon Communications and AT&T. Through the lens of economic moat, these two should score incredibly high. Both operate in a triopoly for the wireless communication industry and still have significant market share in wired communication (phone, home internet, etc.). It would take billions upon billions of dollars for any new entrant to displace any of the major players, and chances are customers’ need for wireless telecommunication will remain for many years to come.

Despite these inherent competitive advantages, they haven’t really added up to good returns for investors. Over the past 30 years, Verizon and AT&T’s annualized returns have been 6.5% or less. That’s much closer to the long-term returns of bonds than stocks.

At the same time, many businesses out there have what many would consider weak or nonexistent moats.

One stellar example is Plexus Corp (NASDAQ: PLXS). Good luck using conventional moat analysis (I’m using Pat Dorsey’s The Little Book that Builds Wealth as a rough guide for identifying moats) to determine what has enabled this electronics manufacturing services company to produce a 12.75% annualized return over the past 30 years.

Let’s dig into this phenomenon of a low-moat business producing stellar returns, what has ultimately made it such a strong-performing business & stock, and challenge conventional thought on economic moats.

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