Last week I wrote an article about the 7 most important questions to ask when investing. Question 3 was, “Does the company have a strong moat?”

Now it’s all well and good to answer that question based on an opinion, but wouldn’t it be grand if we could find an answer based on hard facts and data?

With that in mind, I went digging through some of my favorite books to see what I could come up with. And wouldn’t you know it, I didn’t have to dig very far. In fact, I hardly did any digging whatsoever. It seems that Pat Dorsey (Morningstar’s Director of Stock Analysis) was kind enough to list 4 things (in his book, “The Five Rules for Successful Stock Investing”) that, taken together, do a relatively good job of telling us which companies have strong economic moats.

In fact he states, “The concept of economic moats is crucial to the way Morningstar analyzes stocks because a moat is the characteristic that helps great-performing companies to stay that way.” He goes on to credit Warren Buffett and Harvard professor Michael Porter for the idea of an economic moat.

Now if you’ve been following me for any period of time, you know I like to test things rather than just take them at face value. So, even knowing that Dorsey probably does tons of testing in his role at Morningstar (not to mention he probably has lots of staff who also test for him), I thought I’d run some companies through his Moat Test and see which ones rose to the top.

Then I’d analyze them, using a Buffett-like fundamental rating system, and see if there was any correlation between great fundamentals and Dorsey’s economic moat.

The results are very interesting to say the least.

However, before I get to them, here are Dorsey’s 4 Moat defining criteria:

1) Free Cash Flow / Sales is 5 percent or better (I also went back 5 years and required that the company beat this mark in all 5 years).

2) Net Margins greater than 15 percent (again, the company had to beat this mark in each of the past 5 years).

3) Return on Equity above 15 percent (in each of the past 5 years).

4) Return on Assets higher than 6 percent in each of the past 5 years.

I also added one more criterion, which comes right from Buffett’s own strategies, and that is Depreciation / Gross Profit being less than 18% for a general pass and 8% or less for a big fat A+. Buffett has found that companies with lower Depreciation tend to have a sustained durable competitive advantage (which translates into a strong economic moat).

Alright then. Armed with these 5 criteria, I proceeded to test about 7800 stocks (those trading on the NYSE, NASDAQ and AMEX exchanges).

And this is what I found.

Forty companies had perfect scores on Dorsey and Buffett’s moat test (that’s about one half of a percent, if you’re keeping track).

For those who like to see tickers, here they are:

COH, INTU, ALTR, WAT, NVO, JCOM, SIAL, HITT, PAYX, ACL, ADTN, CHKP, CSCO, OXPS, BTI, JNJ, STRA, WRLD, SAP, FII, KO, GRMN, SOHU, FDS, LDR, NTES, TECH, INFY, DEO, TSP, APOL, CTSH, LOOP, NVS, PRAA, TROW, WFR, SAY, CTRP, QCOM

Right off the bat I noticed some great companies in there (PAYX, QCOM, KO, CSCO and SAP to name a few) that I know have solid economic moats. So maybe this Dorsey guy was onto something. At least it was worth further probing.

The next step was to evaluate these 40 stocks to see if their fundamentals were any good.

I used a rating system I developed based on Buffett’s voluminous works. The maximum possible score is 32 and anything that scores 25 or above is considered a fundamentally solid stock.

Here’s what I found:

21 stocks scored 25 or above. five scored 24, three scored 23, two scored 22, two scored 21, four scored 20, two scored 19 and one came in at 17.

So just over 50% of the stocks with strong moats also had excellent fundamentals. Plus when you think about it, another 8 just missed the mark (so it’s not like they’re slouches in the fundamentals department).

Now I’m not saying this was a scientific test or anything like that, and I’m definitely not saying that you should rush out and buy any of these companies – because, after all, they might be good companies, but they could also be highly overvalued (which I can tell you, according to the valuations I did on them, most are – in fact only 9 are what I would call attractively priced at the moment).

However, it does appear that Dorsey is onto something here. And it makes sense. If a company has a strong moat that allows it to beat out its competition, then it should be able to make more money than everyone else. And that’s the beginning of a strong company – one in which Warren Buffett likes to invest (and you should too).