By Joseph Lisanti As the 2005 World Series again demonstrated, one of the great thrills in baseball is the grand slam. Nothing brings the crowd to its feet like seeing four runs score from one long-ball hit. But most games aren't won with grand slam home runs. Singles and doubles are the daily workhorses of the national pastime.
That's a lesson we think investors should remember. Despite the hype that always seems to surround hot stocks, investment grand slams are few and far between. And we believe that people reaching for them are more likely to strike out, as they did when the tech bubble burst in 2000.
So what are the stock market equivalents of singles and doubles? We think they are the slow and steady returns you can get from stocks of companies that offer consistent earnings and dividend growth. A quick way to identify many of these investments is to look for stocks that have been accorded above-average
S&P quality rankings. That means stocks ranked A-, A, and A+ for growth and stability of earnings and dividends over the past 10 years.
We currently recommend an overweight position in two market sectors, consumer staples and health care. Sam Stovall, Standard & Poor's chief investment strategist, notes that 80% of the consumer staples stocks in the S&P 500 have above-average quality rankings, as do 49% of the health care issues in the index.
Not surprisingly, stocks in these two sectors also show a high return on invested capital (ROIC). For consumer staples stocks in the S&P 500, the five-year compound annual growth rate for ROIC is 14%. For heath care stocks in the index, it's 13%.
High-quality consumer staples and health care stocks ranked four or five STARS by Standard & Poor's analysts look to us to be a good choice in the market we foresee. They may not be grand slams, but singles and doubles can make you a winner. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook