In this article, we discuss 10 Best Quality Stocks to Buy Now. You can skip our detailed analysis of iShares MSCI USA Quality Factor ETF and quality stocks, and go directly to 5 Best Quality Stocks to Buy Now.
As the market remains uncertain and the downturn in equity markets continues, many investors have molded their investment strategies to suit the current market conditions. Investing in growth stocks has yielded significant returns for investors in a bull market, especially after COVID-19, as the market bounced back quickly after a brief period of recession in 2020. But the current FED rate hiking cycle has wreaked havoc on many growth stories as they collapsed because of over-reliance on a spurring economy with high consumer spending. Therefore, in volatile market conditions such as one today, it is imperative that investors look for quality stocks which have sound fundamental metrics and are trading on a fair valuation.
Although there are numerous investment funds and that incorporate quality strategies into their investment management framework, there is no universally agreed upon definition of the “Quality factor”. While there is a generally understood definition in the literature which measures Quality by various metrics such as the price-to-book (P/B) metric and the price-to-earnings (P/E) metric, there are also other accepted measures, such as price-to-cash flow (P/CF), and price-to-earnings before interest, taxes, depreciation, and amortization (P/EBITDA), etc.
AQR Capital Management has defined companies with quality factor that have the following characteristics: low earnings volatility, high margins, high asset turnover (showing efficient asset usage), low financial leverage, low operational leverage (indicating a solid balance sheet and low macroeconomic risk), and low stock-specific risk (volatility that is unexplained by macroeconomic activity). Companies with these characteristics have typically delivered better returns, particularly in weak markets. High-quality firms that are profitable, stable, expanding, and have a high payout ratio beat low-quality stocks that have the opposing traits.
Jason Hsu, Vitali Kalesnik, and Engin Kose add to the literature on the quality factor with their paper “What Is Quality?” which was published in the Journal of Financial Analysts’ in the Second Quarter of 2019.
They analysed the following characteristics: profitability, earnings stability, capital structure, growth, accounting quality, payout/dilution, and investment. Here is what they concluded:
“All of the selected quality characteristics are viewed as being attractive firm attributes, those characteristics investors would generally be willing to ‘pay up’ for. Implicit in the design is that the high-growth and high-profitability firms with low debt and conservative accounting practices are underpriced and thus generate high returns! This should raise alarms for the economists among us. It’s not just a free lunch, it’s a free feast!”
Although there are various metrics to define a Quality factor within a company, what is unanimously agreed upon by investors is that companies with quality factor are attractive for long-term investors as they are more capable of generating returns due to the sound fundamental characteristics of their business.
Given the Federal Reserve is raising rates, many stocks could go lower. Nevertheless, long term investors who invest in quality companies could have a good opportunity given current valuations.
Pixabay/Public Domain
Methodology
Because there is no universally agreed metric for quality, we decided to use a ETF to help filter stocks instead. For our list, we took the positions of iShares MSCI USA Quality Factor ETF as of September 9, 2022 and sorted them based on the number of hedge funds in our database that held positions in each stock at the end of Q2 2022. Of that list, we took the top 10. We also included the weight percentage that each stock accounted for in the iShares MSCI USA Quality Factor ETF as a subheading.
10 Best Quality Stocks to Buy Now
10. Activision Blizzard, Inc. (NASDAQ:ATVI)
Number of Hedge Fund Holders: 84
% of iShares MSCI USA Quality Factor ETF Holdings: 0.42%
Activision Blizzard, Inc. (NASDAQ:ATVI) creates, produces, and sells interactive entertainment software and products. The company’s product line includes action-adventure, sports, racing, role-playing, simulation, first-person action, music-based gaming, and strategy games. Activision’s impressive franchise portfolio includes Call of Duty, which has sold over 175 million copies over the past 12 years.
On Thursday, September 15, Activision Blizzard, Inc. (NASDAQ:ATVI) will release the most recent information on the future of Call of Duty game. The much-anticipated event titled “Call of Duty: Next” will provide new developments on Call of Duty: Modern Warfare II multiplayer, along with the new Call of Duty: Warzone 2.0, and Call of Duty: Warzone Mobile.
Activision Blizzard, Inc. (NASDAQ:ATVI) was held by 84 hedge fund holders in our database at the end of Q2 2022 and is therefore included in our list of 10 Best Quality Stocks to Buy Now. The stakes held by hedge funds in the stock collectively value over $9.2 billion. Berkshire Hathaway was the stock’s leading stakeholder in Q2, owning Activision Blizzard, Inc. (NASDAQ:ATVI) shares worth over $5.3 billion.
Alongside Visa Inc. (NYSE:V), Meta Platforms, Inc. (NASDAQ:META), and Microsoft Corporation (NASDAQ:MSFT), Activision Blizzard, Inc. (NASDAQ:ATVI) is a quality stock that’s held by many hedge funds at the end of Q2 2022.
9. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Holders: 87
% of iShares MSCI USA Quality Factor ETF Holdings: 0.84%
Advanced Micro Devices, Inc. (NASDAQ:AMD) manufactures microprocessors for the computer and consumer electronics industries. CPUs and GPUs account for the majority of the company’s revenues in the personal computer and data centre markets.
Advanced Micro Devices, Inc. (NASDAQ:AMD) was held by 87 hedge fund holders in our database at the end of Q2 2022 and is therefore included in our list of 10 Best Quality Stocks to Buy Now. The stakes held by hedge funds in the stock collectively value over $4.8 billion. Fisher Asset Management was the stock’s leading stakeholder in Q2, owning Advanced Micro Devices, Inc. (NASDAQ:AMD) shares worth over $1.9 billion.
Here is what Carillon Tower Advisers had to say about Advanced Micro Devices, Inc. (NASDAQ:AMD) in its Q4 2021 investor letter:
“Advanced Micro Devices (AMD) supplies semiconductor chips for central processing units (CPUs) and graphic processing units (GPUs). The firm has been gaining share against its primary competitor in the datacenter server CPU space, as this rival has been unable to match the design and manufacturing capabilities of AMD and its partners. Investors are also looking forward to the closing of the previously announced merger with a semiconductor manufacturer that is another one of the portfolio’s holdings. The merger will increase AMD’s capabilities in the Field Programmable Gate Array (FPGA) chip space, and the combined company should possess the potential to win additional market share in the datacenter chip market.”
8. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Holders: 92
% of iShares MSCI USA Quality Factor ETF Holdings: 1.24%
Adobe Inc. (NASDAQ:ADBE) offers tools and services for content production, document management, and digital marketing to creative professionals and marketers. The company’s business is divided into three segments: digital media content creation, digital experience for marketing solutions, and legacy product publication.
Recently, Barclays analyst Saket Kalia lowered the price target on Adobe Inc. (NASDAQ:ADBE) to $440 from $445 while maintaining an Overweight rating on the shares. The analyst believes that the upside for net new annual recurring revenue in Q3 is $455 million and that the full-year target of $1.9 billion is attainable.
Adobe Inc. (NASDAQ:ADBE) was held by 92 hedge fund holders in our database at the end of Q2 2022. The stakes held by hedge funds in the stock collectively value over $7.5 billion. Fisher Asset Management was the stock’s leading stakeholder in Q2, owning Adobe Inc. (NASDAQ:ADBE) shares worth over $2.2 billion.
7. Netflix, Inc. (NASDAQ:NFLX)
Number of Hedge Fund Holders: 95
% of iShares MSCI USA Quality Factor ETF Holdings: 0.72%
Netflix, Inc. (NASDAQ:NFLX) principal business is a streaming video-on-demand service that is currently accessible in almost every country, except China. Netflix provides original and third-party digital video content to PCs, internet-connected televisions, and consumer electronic devices, such as tablets, video game consoles, Apple TV, Roku, and Chromecast.
Netflix, Inc. (NASDAQ:NFLX) was held by 95 hedge fund holders in our database at the end Q2 2022 and is therefore included in our list of 10 Best Quality Stocks to Buy Now. The stakes held by hedge funds in the stock collectively value over $4.7 billion. Fisher Asset Management was the stock’s leading stakeholder in Q2, owning Netflix, Inc. (NASDAQ:NFLX) shares worth over $1.1 billion.
Here is what Oakmark Fund has to say about Netflix, Inc. (NASDAQ:NFLX) in its Q2 2022 investor letter:
“Netflix‘s stock price was down considerably after providing a weaker than expected outlook for both subscriber growth and profit margins. After meeting with management and scrutinizing our investment thesis, we lowered our estimate of business value to account for the company’s softer near-term guidance. However, we believe the decline in the company’s share price more than adjusts for this. Indeed, Netflix now trades for a discount to the S&P 500 Index on next year’s GAAP earnings despite our view that the company remains a much better than average business run by a highly accomplished management team. We believe the company’s lead in streaming remains intact and we expect terminal operating margins to be substantially higher than they are today. Furthermore, we are encouraged by Netflix’s potential to enhance revenue growth through advertising, the monetization of password sharing and further penetrating international markets.”
6. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 128
% of iShares MSCI USA Quality Factor ETF Holdings: 3.68%
Apple Inc. (NASDAQ:AAPL) develops a number of consumer electronics, including smartphones (iPhone), tablets (iPad), personal computers (Mac), smartwatches (Apple Watch), AirPods, and television set-top boxes (Apple TV). The iPhone is the primary source of income for Apple. Apple’s goods are sold online, in company-owned shops, and via third-party merchants.
Despite supply restrictions, Apple Inc. (NASDAQ:AAPL) announced Q2 2022 sales of $83.0 billion, up 2% year-over-year. The company’s normalized EPS for the quarter was $1.20, beating the market expectation by $0.04.
This stock was held by 128 hedge fund holders in our database at the end Q2 2022. The stakes held by hedge funds in the stock collectively value at $143 billion. Berkshire Hathaway was the stock’s leading stakeholder in Q2, owning Apple Inc. (NASDAQ:AAPL) shares worth over $122 billion.
Like Apple Inc. (NASDAQ:AAPL), Visa Inc. (NYSE:V), Meta Platforms, Inc. (NASDAQ:META), and Microsoft Corporation (NASDAQ:MSFT) are quality stocks that are widely held by hedge funds.
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Disclosure: None. 10 Best Quality Stocks to Buy Now is originally published on Insider Monkey.
