In the past two days, two of the most successful gurus I follow — GMO’s Jeremy Grantham and Gotham Capital’s Joel Greenblatt — have said that they are seeing a lot of value in “high-quality” stocks, as opposed to the junk-type stocks that have led the recent market surge.
In his third-quarter letter, Grantham says that U.S. “quality stocks (high, stable return and low debt)”, are now trading at “genuine outlier levels” compared to the rest of the market after the junk rally. “In our seven-year forecast the quality segment has a full seven-percentage-point lead over the whole S&P 500, or 9% over the balance ex-quality,” he says.
Greenblatt, meanwhile, told Yahoo! TechTicker that his “magic formula” approach seems to be finding more values in high-quality stocks than in junk-type stocks
With Grantham and Greenblatt’s comments in mind, I scoured my database for stocks that pass one or more of my “Guru Strategies” (each of which is based on the approach of a different investing great), and which could also be considered “high quality”, using Grantham’s definition as a basis. Among the specific criteria I used to define “high quality”:
- earnings per share have increased in each year of the past five-year period, with average annual EPS growth of at least 10%;
- a current ratio (current assets/current liabilities) of at least 2.0, to target stocks with good liquidity;
- debt/equity ratios no greater than 40%;
- market caps of at least $250 million, and share prices of at least $10, to focus on better-known firms.
Here are ten of the top stocks that meet all those criteria: