So called “quality shares” have beaten the wider market for decades. Andrew Oxlade explains which 10 UK stocks make the list today.
Over the years, investors are bombarded with buzzwords and investment fads. Distinguishing barbell investing from a top-down approach, the men in suits would have you believe, is essential to turning a profit.
Wise investors, of course, mostly ignore this bunkum. Yet occasionally, a concept is worth a fair hearing. “Quality stocks” might be one such case. Why? Well, because it seems to work.
The performance of shares that meet the “quality” mark has been impressive, soaring above the wider market.
Andrew Lapthorne, a well regarded analyst at Societe Generale, produced some recent analysis that was largely responsible for drumming up much of the recent interest in quality stocks.
It concluded that a basket of these shares had delivered total returns that have averaged 11.6pc per year since 1990, more than double the return of the global equity market – and with fewer highs and lows along the way.
The returns versus the wider market have been even more impressive since 2000. Stock markets have gone nowhere, but on quality street, prices are two-and-a-half times higher.
So what makes for quality?
Definitions vary but at the broadest level, it is shares that have decent yields but also have the financial firepower under the bonnet to keep paying them. All too often, a company can offer enticing income, but then fail to deliver on this because it simply doesn’t generate enough money to pay shareholders.
The argument is also that companies paying high dividends deliver better returns – because the money is not squandered on acquisitions driven by a power-crazed boardroom but handed back to valued investors.
More technically, something called the Piotroski F-Score is applied (now I’m spreading jargon). This is a nine-point set of rules developed by the Stanford University professor Joseph Piotroski.
Once you have a list of high-yielding, cheap stocks, it takes the screening much further to establish the company’s debt situation, how genuinely profitable it is and its efficiency. Essentially, it sniffs out the companies that are genuinely making money and exposes those that have just created a façade of success.
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To read more go to MSE Meeting rooms central London : http://www.msemeetingrooms.co.uk
Mr Lapthorne produced his own SG Quality Income Index for those in the Square Mile. But in the new age of DIY investors, we can all take advantage. Stockopedia.co.uk, an innovative website, has developed a whole range of notional portfolios based on different ways of investing. It recently launched one – the Quality Income Screen – based on the criteria set out by the SocGen strategy team.
Over one year, it has risen nearly 35pc compared to a 15pc rise for the FTSE 100. However, the pool of stocks that make the grade is shrinking.
Ed Page Croft, the Stockopedia chief executive, told me: “A year ago, there were 18-20 in this set of stocks. Now there are only 10.” But if this method is so foolproof, why isn’t everyone following it?
“The trouble is most fund managers are just juggling career risk,” Mr Page Croft said. “They feel the need to stick with large stocks and momentum stocks, those that have been rising, and then they won’t fall to far behind what everyone else is doing.”
What we all want to know is which UK stocks pass the test? Stockopedia usually charges investors £25 a month to access that information. But for Your Money readers, it has shared the full list. Those that pass the SocGen test, with a market size larger than £800m and yield of more than 4pc, include Centrica (4.71pc yield), Talktalk Telecom (5.3pc), J Sainsbury (4.7pc), Tesco (4.5pc), GlaxoSmithKline (4.6pc) and British American Tobacco (4.4pc).
To read more go to MSE Meeting rooms central London website : http://www.msemeetingrooms.co.uk
To read more go to MSE Meeting rooms central London website : http://www.msemeetingrooms.co.uk
Among mid-cap stocks, there is Ladbrokes (4.4pc), media company UBM (5.3pc), WHSmith (4.32pc) and, perhaps most surprisingly, Russian gold and silver miner Polymetal International. Neither Russia nor the mining industry are known for offering investors stability.
But every investment theory throws up surprises. The crucial point is that wise ways of investing are becoming accessible. Expensive fund managers should be looking over their shoulders.
UK Quality Income Screen vs the FTSE 100
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