The S&P TSX Composite index is down more than 3% year to date, and down a little over 2% from last year. Because of the market dip last month, a number of stocks have slipped below our fair value estimates, and are trading rather cheap at the moment.
One way to find companies that have competitive advantages, and the ability to sustain growth in the long term, would be to look for wide moats.
Coined by Warren Buffet, the term economic moat refers to a company's sustainable advantages over its competitors. This can be achieved in one of five ways: cost advantage, efficient scale, intangible assets, network effect or switching costs. Morningstar assigns its Economic Moat Rating (wide, narrow or no moat) to all the companies its equity analysts cover.
Morningstar research has shown that companies with wide moats tend to be better at sustaining profitability over time than those with narrow or no moats.
In the Morningstar Canadian universe of 3,259 stocks, just five have a wide economic moat. One of these is 
Enbridge (ENB), a five-star rated stock that boasts a wide moat, an attractive 5.8% dividend yield and a cheap valuation -- what analyst Joe Gemino calls a "triple threat."
Two banks also feature on the list, as well as two railway companies. We will look at three of these in detail, but first, here is the entire list:
| Name | Economic Moat | Morningstar Rating | |
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| Canadian Pacific Railway Ltd (CP) | Wide | **** | |
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| Canadian National Railway Co (CNR) | Wide | *** | |
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| Enbridge Inc (ENB) | Wide | ***** | |
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| Royal Bank of Canada (RY) | Wide | **** | |
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| The Toronto-Dominion Bank (TD) | Wide | *** | |
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| Data as of Nov. 7, 2018. Source: Morningstar | |||
Royal Bank of Canada (RY) is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation's banking deposits. The stock also featured as one of the three that Morningstar Investment Management senior analyst Robert Miehm picked to hold for retirement.
With over $5 trillion in assets under administration and over $650 billion under management, strong global capital markets operations and a dominant share of domestic banking operations, it should remain one of the dominant Canadian banks for years to come, says Morningstar equity analyst Eric Compton.
"With superior operating efficiency, leading share in the Canadian banking market, moaty non-bank businesses and the ability to primarily operate in the favourable Canadian banking environment, Royal Bank of Canada is worthy of a wide moat rating, in our view," he says.
The bank has consistently operated with one of the best efficiency ratios in Canada, partially through superior operational execution, and partially due to the highest non-interest income proportion among the Canadian banks.
Additionally, after the market fall last month, Royal Bank is trading below our fair value estimates.
Canadian National's (CNR) railway spans Canada from coast to coast and extends through Chicago to the Gulf of Mexico. Its wide economic moat is based on cost advantages and efficient scale.
Canadian National has long been the highest-margin railroad, and Morningstar analysts don't anticipate it will deviate from its excellent mid- to low 50s operating ratios even as other railroads improve profitability.
"While the rails don't outearn their cost of capital by much, our wide moat rating stems from our confidence that rails will leverage cost advantage and efficient scale competitive advantages to generate positive economic profits for shareholders' benefit with near certainty 10 years from now and more likely than not 20 years from now," says Morningstar sector director Keith Schoonmaker.
Canadian Pacific (CP) is a $6.5-billion railroad operating about 30,000 km of track across most of Canada and in the Midwestern and Northeastern United States.
Like CNR, Canadian Pacific's wide economic moat is based on cost advantages and efficient scale. "The Canadian Pacific system spans Canada from east to west, with some operations in the Eastern U.S. as well, and these rights of way and installed track form a nearly impenetrable barrier to entry. We think there will be no new railroads built, although line extensions by existing railroads (including restoring abandoned lines) may take place in select areas," Schoonmaker says.
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