TOKYO -- Nikkei will begin calculating and publishing the Nikkei Moat Stock Index on Feb. 9. The innovative gauge will target Japanese companies with strong technological capabilities or brand power that can sustain high profitability over the medium to long term. These are seen as having an economic moat -- a concept that has drawn attention from prominent investors such as Warren Buffett. The new index selects such stocks using rules-based, quantitative criteria.
Among companies listed on the Tokyo Stock Exchange's Prime Market, the index first screens for stocks whose sales rank in the top 20% of their industry and whose market capitalization is at least 100 billion yen. It then selects 30 names whose operating cash flow margins -- a gauge of cash generation -- exceed the industry average by the largest margins. The premise is that companies turning a high sales share into cash are regarded as having an economic moat.
When adding new constituents, the index also looks at the PEG ratio, which incorporates earnings growth into the forward price-to-earnings ratio. The design aims to select companies that have economic moats while avoiding stocks that are overpriced.
Initial constituents will include Mitsubishi Corp., Tokyo Electron and Central Japan Railway.
For details, please visit the Nikkei indexes website.
