Connor Leonard groups businesses into 3 categories:
- Companies with a Legacy Moat
- Companies with a reinvestment moat
- Capital Light Compounders
Let’s go into this categorization and I’ve added some examples
- Companies with a legacy moat
This is a company that earns above average returns but has no room to deploy incremental capital. It has no room for growth.
So the business racks up huge amounts of cash but has no place to deploy it and thus returns the cash to shareholders via dividends .
Such a company can be compared to a high yield bond .
An example is the WD-40 company
- Companies with a reinvestment moat
These companies possess the same features as a company with a legacy moat but they are able to reinvest their earnings back into the business at above average rates of return.
If the company has the ability to reinvest but at below average returns , then that company doesn’t have a reinvestment moat .
An example is Amazon
- Capital Light Compounders
This is a company that can grown without much capital investment. Guy Spier refers to this as “CapEx free growth”
And example is Dominos which is a franchiser. So they don’t put up any of the Capital the franchisee does