Value Investing: Quality Matters

While investors have focused on the “Magnificent Seven” stocks for several years, deeper analysis shows that other influences have also driven market returns. In particular, quality has been a powerful and consistent source of equity outperformance. In our latest Perspectives, we look at a definition of quality and how various quality factors have accounted for returns.

We found that quality companies typically have solid profitability, stable and growing earnings that create high free cash flow, and strong balance sheets. Companies with these attributes have weathered economic turbulence and strongly outperformed broader equity benchmarks. Our analysis shows that quality stocks have been clear differentiators, with the higher deciles significantly outperforming the lower deciles.

Consequently, given our belief that quality will continue to be rewarded, we believe investors should consider quality when constructing long-term portfolios.