A basic investment concept is to that high quality stocks fare better in down markets than low quality stocks, and therefore in late stages of a Bull market with generally fully valued stocks, tilting equity allocations toward high quality is prudent.
Accordingly, we set out to identify high quality stocks. We know that sources such as S&P and ValueLine render quality ratings, but they are each a “black box” to a great extent, and we wanted to test quality using some other criteria as well.
We made the assumption that high quality could be identified by:
- trading liquidity
- strong balance sheets
- revenue growth
- long unbroken strings of dividend payment and increase
- wide moats against competition.
With those conceptual criteria in mind, we applied these specific filter criteria to all stocks traded in the United States:
- Wright’s investment grade rating minimum “BBB4″ (see ratings description) for liquidity, financial strength, profitability and growth, based on 32 factors (577 passed filter)
- Member David Fish’s Dividend Champions, Challenger or Contenders (“CCC”) – stocks that paid and increased dividends each year for at least 5 years; some did for decades (543 passed filter)
- Morningstar “Wide Moat” designation (258 passed filter)
- Revenue growth over each of 5, 3 and 1 years at least 3% (1796 passed filter)
- Dividend growth over each of 5, 3, and 1 years at least 3% (657 passed filter)
- Four part Balance Sheet filter (1454 passed filter)
Four part Balance Sheet filter:
- Tangible equity increased at minimum 3% annualized rate from 5th prior fiscal year to most recent completed fiscal year
- Total Liabilities/Tangible Assets not more than that ratio 5 fiscal years ago
- Current Ratio >= 0.9
- Quick Ratio >=0.7
To understand the size of the universe we filtered, consider these sources with more than a combined 8,500 stocks: