The solid bull market run over the past several years has shifted investor interest away from quality stocks toward growth stocks, but those trends might reverse if the market should turn bearish. This is known as the “Flight to Quality.”
Investors who believe the positive trajectory of today’s market will soon come to a close have several investing options in quality stocks to turn to. These stocks may not have the rapid share prices increases that growth stocks enjoy, but they have a more stable balance sheet and dependable earnings.
Quality stocks have fared well over the past year, although not quite as well as growth stocks. The iShares Edge MSCI USA Quality Factor ETF (QUAL), which includes quality stocks like Johnson & Johnson (JNJ), Starbucks Corp. (SBUX) and Visa Inc. (V), rose 20 percent in 2017. This fund includes large- and mid-cap stocks that are “quality” for metrics such as return on equity, earnings variability and debt-to-equity.
Goldman Sachs analysts say quality names can help investors beat the market with long-term growth that not only maintains high returns, but expands them. The firm recently identified 50 quality stocks that it believes have defensive characteristics with long periods of industry leadership, as well as high free cash flow that is improving. Goldman Sachs also factored in valuation, which can help investors find bargains amid a market with sky-high share prices.
“The key ingredients of competitive advantage haven’t changed and likely never will – entry barriers should always be critical as should pricing power and access to…