In a recent research note, BlackRock CIO Tony DeSpirito wrote that higher quality stocks are trading at their largest valuation discount to the broader market since the dot-com bubble of the early 2000s. This according to a recent article in Yahoo Finance.
DeSpirito defines “higher quality” stocks as those with pricing power that also generate profits, the article notes, adding they are companies that “manage their balance sheets and cash flows effectively, demonstrate strong accounting credibility and return capital to shareholders in a disciplined manner (most likely through dividends).”
Although quality stocks have underperformed since November 2020, when Covid-19 vaccine announcements sent their valuations lower, the article reports: “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.”
But now, DeSpirito says, there will be a reversion back to quality: “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.”
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