The US economy is growing at a pace not seen in the last decade, yet the stock market is caught in a web of uncertainty that has little chance of clearing up in the months ahead. In such times, the prudent choice is to stick with quality stocks like these.
The US economy is growing at a pace not seen in the last decade, yet the stock market is caught in a web of uncertainty that has little chance of clearing up in the months ahead. This is primarily thanks to geopolitical tensions, sliding oil prices, sluggish European and Japanese growth, weakness in key emerging markets, and rising interest rate concerns.
Additionally, the currency war has escalated, with many countries choosing loose monetary policies to stimulate growth and prevent deflationary pressures. This is in contrast to the US Fed policy of tightening the stimulus program by wrapping up QE3. The diverging central bank policies have propelled the US dollar against the basket of various currencies to multi-year highs.
Further, both the World Bank and International Monetary Fund (IMF) recently cut their growth forecast for the next 2 years, spreading jitters among investors. The World Bank projects the global economy to expand 3% this year and 3.3% in the next, down from 3.4% and 3.5%, respectively.
On the other hand, IMF lowered its global growth outlook to 3.5% from 3.8% for 2015, representing the sharpest cut in 3 years. Growth for 2016 is forecast at 3.7% versus the previous projection of 4%.
Amid these uncertainties, quality investing seems a prudent choice. This is because quality stocks are generally rich on value characteristics and focus on high quality scores based on 3 fundamental factors—high return on equity, stable or rising year-over-year earnings growth, and low leverage. This approach seeks safety and protection against volatility in turbulent times.
Academic research shows that high quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. More importantly, these stocks generally outperform in a crumbling market.
How to Pick Quality Stocks?
While it is hard to assess the quality of the stocks, we have tried to spot them using our Zacks Stock screener. In this process, we have screened through a number of metrics. First, we have selected the stocks with a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold). Then we narrowed down the list by screening through the following metrics:
1. ROE of at least 10%
2. Debt-to-Equity ratio of less than 1
3. Historically positive 5-year EPS growth
4. Current year positive EPS growth
5. Current year earnings estimate revision on the rise over the past one month
6. Dividend yield of greater than 1%
Below are 3 high-quality stocks that have an excellent earnings record and a strong balance sheet and could hold up well during market swings.
Based in Lake Oswego, OR, Greenbrier Companies is a leading supplier of transportation equipment and services to the railroad industry in North America and Europe. The company has a solid track record of above-average earnings growth of 93% over the past 5 years and this trend is likely to continue with the expected 76.7% earnings growth for this fiscal year. Further, the stock has seen solid earnings estimate revisions of 20.7% to $5.43 over the past 30 days for the current fiscal year.
From a balance sheet perspective, Greenbrier has lower debt with debt-to-equity ratio of 0.74 while return on equity (ROE) is high at 21.2%, above the industry average of 18.4%. Additionally, it yields 1.1% in annual dividends. The stock has a Zacks Rank #1 and boasts a solid Zacks Industry Rank in the top 11%.
Based in New York, Foot Locker is a leading global retailer of athletically inspired shoes and apparel. The company has seen earnings growth of 43% over the past 5 years and expects 10.68% year-over-year earnings growth this fiscal year. The current Zacks Consensus Estimate has risen by 2 cents to $3.86 per share over the past 30 days.
Foot Locker’s debt-to-equity ratio of 0.05 is one of the lowest in the industry and return on equity of 19.5% is also good. The company has 1.65% in annual dividend yield. The stock has a Zacks Rank #3 and a solid Zacks Industry Rank in the top 28%.
Based in Little Rock, AR, Bank of the Ozarks is the holding company that provides a range of retail and commercial banking services. It is recognized as the top performing bank in the United States for 4 consecutive years. This is because the company’s earnings growth was a stellar 22.4% over the past 5 years and is expected at 32.3% year over year in 2015. The company has seen an upward earnings estimate revision of 6 cents for the current year over the past 30 days.
Further, the company has a strong balance sheet with ROE of 14.4% and debt-to-equity ratio of 0.28 versus the industry average of 7.6% and 0.47, respectively. The stock currently has a Zacks Rank #2 and Zacks Industry Rank in the top 31%, indicating its high quality.
This article originally appeared at Zacks.com. Reprinted with permission.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Neither Zacks Investment Research, Inc., Physician's Money Digest, nor the information providers have any liability, contingent or otherwise, for the accuracy, completeness, timeliness, or correct sequencing of the information or for any decision made or action taken by you in reliance upon information or "Zacks.com," "PhysiciansMoneyDigest.com," or "HCPLive.com" or for interruption of any data, information or any other aspect of "Zacks.com," "PhysiciansMoneyDigest.com," or "HCPLive.com." The past performance of a mutual fund, stock or investment strategy cannot guarantee its future performance.