What Makes A Stock A ‘Quality’ Stock?
Spencer White , Benzinga Staff Writer
July 12, 2017 2:48pm
Investors pick stocks for a nearly-infinite number of reasons to achieve their investing objectives.
Some people look for value stocks, or stocks that are perceived to be undervalued compared to their peers. Others look to growth stocks, or stocks that are due for future growth. Others still may look for income or yield stocks that will provide income via dividends.
But there’s a fourth category of stocks, popularized by investor and “Shark Tank” star Kevin O’Leary. He invests in “quality” stocks and has helped launch ETFs that do the same, like the O’Shares FTSE U.S. Quality Dividend ETF (NYSE: OUSA). But what makes a stock a “quality” stock?
For starters, quality stocks will grow consistently over long periods of time, deliver dividends, and have favorable balance sheets. In particular, quality stocks have consistent profitability and low leverage.
Popping on Profits
The first rule of business applies to stock picking—the company has to make a profit. Companies that are able to generate more profits for themselves have a higher potential in generating higher returns for their investors.
This seems elementary, but big-name Wall Street darling stocks like Amazon, Tesla, and other tech names either rarely or never turn profits. While these companies are potentially valuable investments, investors with a long-term horizon should avoid betting that a company will turn profitable in the future. There’s no guarantee this will ever happen.
Profitability has a few components, as well. Investors looking for quality stocks should make sure these companies have a track record of being able to consistently grow their earnings over time.
Long-term investors should also be looking for cash profits, not profits derived from accruals like depreciation. Avoid companies reporting IOUs as profits, either. In the words of Biggie Smalls—credit? Forget it.
Lose The Leverage
The other side of the quality coin is the debt the company carries. Leverage is a measure of the company’s debt load and its ability to meet its interest obligations. In the simplest terms, a company’s leverage ratio is a measure of its cash flow to total debt.
Companies that are able to regularly pay their creditors are like borrowers with good credit history—you can reasonably expect you’ll get your money back and then some. If companies are struggling to pay down debts, they aren’t good long-term homes for your money.
Quality stocks are meant for people who are looking for safety in the equities markets. These stocks are not resistant to drawdowns—no stocks are immune to that—but the characteristics of their balance sheets makes them good long-term investments.
As the shark himself says, ‘You will never go broke, making a profit’. Investing in stocks and ETFs that are built on these characteristics could help you live up to that.
O’Shares Investments is an editorial partner of Benzinga. We collaborate on stories that are educational, or that we think you will find interesting.
© 2017 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Before you invest in O’Shares ETF Investments funds, please refer to the prospectus for important information about the investment objectives, risks, charges and expenses. To obtain a prospectus containing this and other important information, please visit www.oshares.com to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing including the possible loss of principal.
Concentration in a particular industry or sector will subject the Funds to loss due to adverse occurrences that may affect that industry or sector. The funds may use derivatives which may involve risks different from, or greater than, those associated with more traditional investments. The funds' emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund's purchase of such a company's securities. Returns on investments in foreign securities could be more volatile than, or trail the returns on, investments in U.S. securities. Exposures to foreign securities entail special risks, including political, diplomatic, economic, foreign market and trading risks. In addition, unless perfectly hedged, the Fund’s investments in securities denominated in other currencies could decline due to changes in local currency relative to the value of the U.S. dollar, which may affect the Fund’s returns. The funds' hedging strategies may not be successful, and even if they are successful, the funds' exposure to foreign currency fluctuations is not expected to be fully hedged at all times. See the prospectus for specific risks regarding the Fund.
The securities of small capitalization companies are often more volatile and less liquid than the stocks of larger companies and may be more affected than other types of securities during market downturns. Compared to larger companies, small capitalization companies may have a shorter history of operations, and may have limited product lines, markets or financial resources.
Companies involved with the Internet, technology and e-commerce are exposed to risks associated with rapid advances in technology, obsolescence of current products and services, the finite life of patents and the constant threat of global competition and substitutes.
Past performance does not guarantee future results. Shares are bought and sold at market price (not NAV), are not individually redeemable, and owners of the Shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, consisting of 50,000 Shares. Brokerage commissions will reduce returns. Shares are not individually redeemable and can be redeemed only in Creation Units. The market price of shares can be at, below or above the NAV. Brokerage commissions will reduce returns. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 PM Eastern time (when NAV is normally determined), and do not represent the returns you would receive if you traded shares at other times.
O’Shares ETF Investments funds are distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC is not affiliated with O’Shares ETF Investments or any of its affiliates.