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Quality Stocks: Poised to Make a Comeback

Emanuele Bergagnini, CFA, Senior Client Portfolio Manager
Wendy Lee, CFA, Senior Client Portfolio Manager

There’s decades worth of academic research that indicates that high quality stocks—equities with characteristics such as above average cash flows, returns on equity and other metrics—have outperformed their lower quality rivals over the long run. Furthermore, there’s research that indicates that while lower quality stocks have often outperformed in the early parts of a stock market rally, eventually their performance is eclipsed by higher-quality names.

But as many investors have seen, this rally has been different. From March 2009 through the end of 2013, lower quality stocks have outperformed higher quality names by about 100 percentage points. Even more surprisingly, that outperformance accelerated during the first months of 2013, not a time frame that any observer could call the early part of the rally. There is another factor that has helped lower quality names outperform.

This paper identifies that factor: government action. We’ll identify how low quality names benefitted from certain government moves. We will also explain why that governmental tailwind might be going away soon. (Indeed, a look at the performance of high quality vs. low quality in the second half of 2013 may be a leading indicator of what may happen if it does.) Indeed, the era of high quality outperformance may just be around the corner.

Access The Upcoming "Quality" Stock Rotation white paper to learn more.


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