TheStreet Network: TheStreet | MainStreet | BankingMyWay | RealMoney

Description:

10% is a great gain, don't blow it//// Set stops behind 10 to 20% gains to protect profits. Quiting while your ahead is not the same thing as quiting.

Cash flow generation, debt-free balance sheets and a significant and sustainable competitive advantage in the marketplace are some of the reasons great companies stand out from the pack.


What is it that separates companies that thrive for decades from the ones that flounder for years?

The answer may lie in what is referred to as a company's economic moat, a phrase popularized by investing legend Warren Buffett. In this article, we'll introduce you to the concept and explain why it is so important to consider as a long-term investor.

What is an Economic Moat?
Economic moat refers to the character and longevity of a corporation's competitive advantage over similar companies competing in the same industry. If Company A is producing excess profits, competitors B, C and D will soon take note and attempt to enter the industry and do the same. As capital flows into the industry, the new competition will erode their profits, unless Company A has an advantage over its competitors.

An economic moat is a barrier that protects a firm and its profits from competing firms. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders. Without a wide economic moat, there is little to prevent competitors from stealing market share and thus profits.


Fast Growers

These companies have little debt, are growing earnings at 20% to 50% a year, and have a stock price-to-earnings ratio below the company's earnings growth rate. Investing in these types of stocks makes sense for investors who want to find solidly financed, fast-growing companies at reasonable prices.

Slow Growers

Here Lynch is looking for companies with high dividend payouts, since dividends are the main reason for investing in slow-growth companies. Among other things, he also requires that such companies have sales in excess of $1 billion, sales that generally are growing faster than inventories, a low yield-adjusted price/earnings-to-growth ratio, and a reasonable debt-to-equity ratio. Investing in these types of stocks makes sense for income-oriented investors.

Stalwarts

Stalwarts have only moderate earnings growth but hold the potential for 30%-to-50% stock price gains over a two-year period if they can be purchased at attractive prices. Characteristics include positive earnings; a debt to equity ratio of .33 or less; sales rates that generally are increasing in line with, or ahead of, inventories; and a low yield-adjusted price/earnings-to-growth ratio. Investing in these types of stocks makes sense for investors who aren't willing to pay up for high-growth companies but still want the chance to enjoy significant capital gains./////PEG ratio results greater than 1 suggest one of the following:

The market's expectation of growth is higher than consensus estimates.
The stock is currently overvalued due to heightened demand for shares.
PEG ratio results of less than 1 suggest one of the following:

Markets are underestimating growth and the stock is undervalued.
Analysts' consensus estimates are currently set too low./////Ignoring trading volume in ETFs can prove costly for investors.!!!

With a ShareBuilder Automatic Investing Plan you can:

• Invest any dollar amount on Tuesdays exclusive online
• Schedule investments on a weekly or monthly basis
• Select from our list of over 6,000 stocks and ETFs

Investments and funding instructions can be edited up to 5:00pm (ET) on the Monday before your purchase. Real-time trade fees apply to all sales/////PEG ratio results greater than 1 suggest one of the following:

The market's expectation of growth is higher than consensus estimates.
The stock is currently overvalued due to heightened demand for shares.
PEG ratio results of less than 1 suggest one of the following:

Markets are underestimating growth and the stock is undervalued.
Analysts' consensus estimates are currently set too low.

Get stock quotes and business news on TheStreet