OrmontUS (my big brother Jeff) used to say, “Quality is always in style.” Many investors agree, so high-quality stocks are bid up to high multiples.
**When Bad Things Happen to Good Stocks**
**Investing in quality stocks seems like a smart move—but the bet on the blue chips hasn’t paid off lately**
**By Jason Zweig, The Wall Street Journal, Sept. 23, 2022**
**Over the past few years, exchange-traded funds specializing in quality stocks have grown to more than $60 billion. With the S&P 500 down 20% this year, several of these ETFs have fallen even harder, losing as much as 25%. ...Quality companies typically earn more of their profits farther into the future than cheap “value” firms do—making their earnings less valuable in a time of rising inflation and interest rates....**
**Measures of quality**
**Profitability — their operating profit, divided by net worth. That approach has lost less money than the overall market this year. Steady earnings growth, high cash flow, low debt or the rate of change in net operating assets, strong “moats,” meaning that they seem likely to be able to outcompete their rivals for years to come.**
**In a falling market, the easiest and least painful way for investors to raise cash is to sell off their biggest winners first. That’s contributed to a wave of selling in some of the top-performing — and highest “quality” — stocks of the past few years....Even after their recent pounding, quality stocks are still more expensive, relative to the market as a whole, than they’ve been 90% of the time since 1990...** [end quote]
High-quality companies mentioned in the article include Home Depot Inc., Microsoft Corp. and 3M Co. Facebook’s parent Meta Platforms Inc., down more than 57% so far in 2022; Google’s holding company, Alphabet Inc., off 31%; Abbott Laboratories which has lost 27%.
There are funds that specialize in “high quality” stocks but they have fallen badly recently.
I still believe in holding high-quality stocks, but I don’t believe in overpaying for them.
As the Fed’s noose tightens around the stock market’s neck, speculators will gradually be forced to throw out the baby with the bathwater to answer margin calls. The market is far from revulsion right now. Wait until 1@23 when the Fed funds rate will be over 4%.