Even excellent, quality businesses can become bad investments if purchased at high valuations. We believe that is the case with Illinois Tool Works (ITW) right now. The company is trading at very high valuation levels even in the midst of an economic recession. ITW is arguably one of the best-in-class industrial stocks protected by competitive advantages operating in a highly cyclical industry.
It is hard to precisely pinpoint where ITW gets their “moat”. However, two very well-known characteristics of businesses enjoying competitive advantages can be represented by high returns on invested capital and