Market Minute

From Our Investment Teams


Macro & Market | April 2022

Why Quality Stocks Now?


We think holding quality equities is always in style, but current conditions appear particularly favorable. 


Key Takeaways

We believe high-quality companies are particularly attractive now.

High-quality stocks have historically outperformed the broad market over the long term.

High-quality companies are trading at a discount to the broad market.

Download Market Minute

Why Quality Stocks Now?
Download PDF  



What is the Definition of Quality?

In our view, quality companies have the following characteristics. 

Productive Assets

✓ Low Financial Leverage

  • Low balance sheet risk.
  • Low levels of debt. 

Franchise Sustainability

  • Sustainable competitive advantage.
  • High barriers to entry.


Long-Term Performance



We compared the long-term performance of high-quality companies to the broad U.S. stock market from 2002 to 2022.

How did high-quality companies stack up?

A $10,000 investment in the S&P 500® Quality Index would have grown to
$77,586

The same investment in the S&P 500 Index would have grown to
$58,687


Growth of $10,000 over the Last 20 Years

Data from 3/31/2002-3/31/2022. Source: Morningstar. Past performance is no guarantee of future results.

Lower Valuations


Price-to-Earnings Ratio (P/E) 

Data from 3/31/2020-2/28/2022. Source: Morningstar. Price-to-earnings ratio (P/E) is the price of a stock divided by its annual earnings per share. A P/E ratio allows analysts to compare stocks based on how much an investor is paying (price) for a dollar of recent or expected earnings. Past performance is no guarantee of future results.

 

High-quality stocks are cheaper than the broad market.

Quality stocks have underperformed since the COVID-19 vaccine announcements in November 2020, sending their valuations lower.

As a result, the S&P 500 Quality Index is trading at a 22% discount to the broader index.

In the future, we think investors will begin assessing risk more prudently as government stimulus fades, economic growth moderates and interest rates rise. 



Explore Previous Market Minutes

Weathering the Supply Chain Storm

Small companies are particularly vulnerable to supply chain problems, but we think some are well-positioned to ride out the storm. Here are the characteristics we look for.

Could Copper Be the New Oil?

We think demand for the industrial metal will grow for decades. That creates investment opportunities, but there are environmental and social consequences.

(Pricing) Power to the People: Equities as an Inflation Hedge

The Consumer Price Index has recently spiked, reflecting the rapid economic rebound the U.S. has experienced so far this year.

Nothing’s Certain but Debt and Taxes

While we can see the case for refreshing America’s vital infrastructure, the question that remains to be answered is, how will we pay for it?

Will Infrastructure Spending Spur Long-term Growth?

Infrastructure is a top priority for President Joe Biden, so he’s proposing spending more than $2 trillion to revitalize American infrastructure.



Definitions

Returns on capital: Net income divided by assets. This measurement shows how well the company uses its assets to generate profits.
Free cash flow: Money remaining after a business pays its operating costs and any capital expenditures.
Accruals ratio: The change in a company’s net operating assets over the last year divided by the company’s average net operating assets over the last two years. Net operating assets are those assets directly related to a company’s operations.
Financial leverage: A company’s latest total debt divided by its book value.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

©2022 Standard & Poor's Financial Services LLC. All rights reserved. For intended recipient only. No further distribution and/or reproduction permitted. Standard & Poor's Financial Services LLC ("S&P") does not guarantee the accuracy, adequacy, completeness or availability of any data or information contained herein and is not responsible for any errors or omissions or for the results obtained from the use of such data or information. S&P GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE IN CONNECTION TO THE DATA OR INFORMATION INCLUDED HEREIN. In no event shall S&P be liable for any direct, indirect, special or consequential damages in connection with recipient's use of such data or information.