Quality is always in style

@OrmontUS (my older brother Jeff) used to say, “Quality is always in style.” That resonates with me.

Forget Meme Stocks and Bitcoin. These Investors Are Hunting Quality.

The targets are shares of companies with mix of growth, reliable profits and strong balance sheets

By Brenda León, The Wall Street Journal, Jan. 15, 2024


They are looking for quality stocks, broadly defined as shares of companies with some combination of growth, reliable profits and strong balance sheets…“Wider moats around their business tend to perform better on a relative basis in comparison to those that are of lower quality.”…

One major reason for their interest: High-quality companies tend to do better than others when growth slows—the environment much of Wall Street expects this year—insulated by their steady financial results, low debt, large cash holdings, or other solid business fundamentals. The MSCI ACWI Quality Index has historically beaten MSCI’s global index by 1 percentage point over six-month periods in which the economy has cooled but kept expanding, according to UBS analysts.

That reliability tends to make quality stocks relatively expensive, which means investors might miss out on some gains in a big rally… “We don’t always look for explosive growth when we’re focusing on quality businesses, but we want attractive long-term growth, and more importantly for us is growth that we think is predictable…”[end quote]

Price matters a lot when buying any asset, including quality stocks.

The article doesn’t mention dividends. However, companies that have paid dividends reliably for many years (e.g. so-called “Dividend Aristocrats”) often have the kind of stable business model that is roughly equivalent to “quality.” A quality stock’s dividend should be well-covered by free cash flow.

It’s important to make sure the company hasn’t been taken over by private equity which will milk it and eventually bankrupt it. Obviously, “zombie companies” are disqualified.

Wendy

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