- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
Quality, growth and value = a winning strategy
High-quality growth stocks, acquired at a bargain price, can provide impressive returns for your portfolio.
In a working paper titled “Quality Minus Junk”, Asness, Frazzini and Pederson “found that stocks categorised as high quality at time t tend to remain high quality up to 10 years later.”
They also discovered that high quality is positively related to stock prices. Why?
“There is little rational justification for why high-quality stocks should command a high return… the high returns earned by quality stocks are still a puzzle”, Frazzini said.
The human race is pretty good at spotting quality (and we’ll often pay a bit more for the privilege) – clothing, cars, property, people – so a gravitation towards quality stocks seems logical.
Quality and value = a winning formula
In a paper titled “Quality and Value: The essence of long-term equity returns”, MFS portfolio managers Katrina Mead, Jonathan Sage and Mark Citro found that value was a higher driver of performance than quality. “Companies that were both high quality and inexpensively valued with respect to fundamentals delivered the most consistent outperformance.”
In short, over time quality is a way to add value, “especially when you marry it with valuation”, MFS managers wrote.
The managers define quality by return on equity (ROE), stability of return on equity and balance sheet strength.
Why is a strong balance sheet an important predictor of future success?
It puts a company in a better financial position to control its own destiny.
“Highly leveraged businesses don’t have a great deal of flexibility. When something unexpected happens, it can put a lot of stress on the company to do uneconomic things to satisfy creditors”, Mead said.
“Having a good balance sheet helps to increase your confidence level that the company has the ability to sustain itself over time. It’s an important source of downside protection”.
And don’t forget about compounding. “I think investors underappreciate how sustainable and persistent the returns of higher-quality companies tend to be”, Mead said.
Why competitive moats sustain long-term performance
Over the long term, top stocks generate impressive profitability because they have a competitive moat: strong brand recognition, valuable intellectual capital and entrenched networks. Sustainable high return on equity is also generally supported by minimal debt.
Take a look at Seek (SEK), CSL and Nick Scali (NCK). Over the last 10 years these stocks have generated average returns on their equity of 36, 24 and 54 per cent.
4 qualities of growth stocks
If you’re on the hunt for growth stocks, look for:
• Profitability (return on equity)
• Consistent earnings growth
• Stable levels of inventories
• Investment in intangibles related to future profitability, such as branding and research and development, which are likely to contribute to future growth