Warren Buffett has become a legendary investor thanks to the unparalleled returns he has achieved throughout his investing career. It is thus natural that many investors try to monitor Warren Buffett stocks.

In this article, we will analyze the key features of one of the highest-quality stocks of the portfolio of the Oracle of Omaha, namely Moody’s Corporation (MCO).

Moody’s was created back in 1909 when it became the first company to analyze securities and rate their investment quality for investors on a large scale. It is now one of the three major credit rating firms, along with S&P Global (SPGI) and Fitch.

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Moody’s passes under the radar of most investors. However, the company enjoys one of the widest business moats in the investing universe and thus it has outperformed the broad market by an impressive margin. During the last decade, the stock has rallied 1001%, much more than the S&P 500, which has rallied 278%.

The importance of the wide business moat of Moody’s cannot be overemphasized. In recent years, competition has heated more than ever in almost every business sector. Consequently, it has become hard for investors to execute the well-known buy-and-hold strategy. Companies that used to thrive for decades have come under pressure due to intense competition and the fast-changing business landscape in almost every sector.

Moody’s is a bright exception. As the three major credit rating firms comprise an aggregate market share of approximately 90%, they essentially operate in an oligopoly. All the countries and companies are essentially obliged to resort to one of these three companies in order to attract a sufficient number of investors for their debt issuances. If their debt is not rated by one of these three agencies, they will not attract a sufficient number of buyers or they will have to pay a higher interest rate.

Thanks to its wide business moat, Moody’s enjoys impressive operating margins. Even better, the company has been able to enhance them over the last decade, from 40% in 2012 to 48% in the last 12 months. It is also important to note that 55% of the revenue of Moody’s is recurring in nature. This renders the company resilient to downturns.

Moreover, the company enjoys exceptionally strong business momentum right now. Due to the pandemic, most countries issued an unprecedented amount of debt in order to support their economies. In addition, numerous corporations have issued appreciable amounts of debt since the onset of the pandemic. As a result, global debt has skyrocketed to an all-time high level. This will be a major tailwind for Moody’s in the upcoming years, as numerous countries and corporations will need to restructure or refinance their debt.

Moody’s has an impressive performance record. During the last decade, the company has grown its revenues and its earnings per share at an average annual rate of 8.8% and 17.3%, respectively. Thanks to the aforementioned tailwind from the steep increase in global debt and the sustained growth in the global demand for financial analysis, Moody’s is likely to remain in its solid growth trajectory for many more years. Management agrees with this view, as it has stated that it expects to maintain double-digit growth of earnings per share in the long run.

The only caveat for the stock of Moody’s is its rich valuation right now. The stock has rallied 32% over the last 12 months and thus it is now trading at a price-to-earnings ratio of 31.4, which is nearly a decade-high valuation level. On the other hand, the rich valuation of Moody’s is natural, given the relentless rally of the broad market in the last 12 months.

To conclude, Moody’s is one of the highest-quality stocks in the investing universe, with an exceptionally wide business moat, a key feature in investing. Given the robust business model of the company and its exciting growth potential, investors should follow the example of Warren Buffett and purchase this stock whenever it incurs a meaningful correction from its somewhat rich valuation level.