“Quality is on sale in the stock market“– BlackRock (NYSE:BLK) CIO of US fundamental equities Tony DeSpirito
“Higher quality stocks are trading at their largest valuation discount to the broad market since the .com bubble of the early 2000s“, Tony DeSpirito said in a new research note.
Mr. DeSpirito defines high quality stocks as those of companies that generate profits and sport pricing power.
The companies manage their balance sheets and cash flows effectively, demonstrate strong accounting credibility and return capital to shareholders in a disciplined manner through dividends.
Interestingly, despite the impressive fundamental features of high quality companies the stocks themselves have lagged for nearly 10 months.
Mr. DeSpirito’s research shows that quality stocks have underperformed since COVID-19 vaccine announcements came to fore back in November 2020, sending their valuations lower.
Instead of paying up to own quality companies amidst a global economic recovery investors have largely avoided or sold these stocks in favor of riskier bets that produced strong gains early in the recovery.
A great example of this dynamic could be seen in the relative performance of the Invesco S&P 500 High Beta ETF.
The ETF has gained a very solid 31% LTD, outperforming the 13% increase in the S&P 500. Meanwhile, the Schwab US Dividend Equity ETF only up 17% YTD.
Mr. DeSpirito says the tide is about to swing back to quality now.
“We see potential for quality to rerate higher. As the cycle evolves, the market will look ahead to more normalized growth rates, and investors are likely to grow more cautious amid concerns around taxes, inflation and the timing of a Fed policy shift,” Mr. DeSpirito explained.
Wednesday’s Market Snapshot
S&P 500 4241.84-4.60(-0.11%)
10-yr T-Note -2/321.489
NYSE Adv 1697 Dec 1526 Vol 823.5-M
NAS Adv 2419 Dec 1761 Vol 4.3-B
Industry Watch Strong: Energy, ConsDiscretionary, Financials
Weak: Utilities, ConsStaples, Healthcare, Materials Moving the Market NAS closed at record high Weaker-than-expected May
Have a positive day, Keep the Faith!