Stocks: In Search of Quality
In the eight years since the bursting of the technology bubble in March, 2000, high-quality stocks (as measured by a proprietary Standard & Poor's system) have outperformed lower-quality issues. In the last 96 months high-quality stocks have put up an average monthly gain of 0.39%, while lower-quality issues have gained only 0.30%.
S&P's Quality Rankings have been provided for stocks since 1956. The quality ranking system measures the growth and stability of a company's earnings and dividends. A ranking of A+ is the highest, while B+ is average.
If a company pays a dividend, it is highly unlikely its stock will be ranked below B-, even if the company has incurred losses. However, companies that haven't paid any dividend over the past 10 years will likely receive a ranking no higher than A-. Companies in bankruptcy automatically receive a ranking of D. For performance measurements, S&P considers any stock with a quality ranking of A- or higher to be high quality.
In assessing quality rankings, S&P recognizes earnings and dividend performance is the result of a variety of factors, such as industry position, corporate resources, and financial policies. The rankings do not reflect all of the factors, tangible or intangible, that bear on a stock's quality.
Quality rankings are generated by a computerized system that analyzes per-share earnings and dividend records from the most recent 10-year period. We think this time frame is long enough to measure significant growth, encompass trend changes, and reflect the full range of a business cycle.
In this week's screen, we looked for stocks that were upgraded to A+ in the past four months. Five stocks made the cut: