The Quest for Quality
With equity markets displaying heightened volatility in recent months, quality has become the watchword for investors. For this week's screen, we thought we would use a fairly rigorous set of criteria to sift for issues on the upswing in terms of key indicators of financial health, earnings and dividend quality, and potential for capital appreciation. It turned out to be one of our tougher screens in recent memory.
Here's how we set it up. First, we did something a little different: We turned to Standard & Poor's Ratings Div. We sifted for companies that have seen increases in their S&P credit ratings over the past 12 months. It's important to note that S&P's credit-rating arm operates separately from S&P's equity research unit, and that credit ratings should not be interpreted as a gauge of a company's merits as an equity investment. Nonetheless, a rising credit rating can be considered a signal of a company's improving finances.
Next, we returned to the S&P equity toolkit. We looked for outfits that posted increases in their S&P Quality ranking over the past 12 months. This is S&P's computerized measure of earnings and dividend growth over the past 10 years.
Then, to ensure that the names on our list had good potential for capital appreciation, we screened for companies that had seen increases in their S&P STARS ranking over the past 12 months.
Further, each stock had to be ranked 4 STARS (buy) or 5 STARS (strong buy) by S&P equity analysts. Stocks with those designations are expected to post total returns exceeding the total return of the S&P 500 index over the coming 12 months and to rise in price on an absolute basis.
As we said before, this was a tough one. Just three high-quality names turned up:
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