Quality will rule

Now that financial Armageddon seems to have been avoided and the stock market is up over 55%, a lot of investors are wondering where to invest next. My answer: quality.

Quality is always a good place to invest, but it may be particularly important going forward. There are a couple of reasons I think this.

One is that quality companies have mostly been left behind in the rally since March. They haven’t completely been left behind, mind you, but they aren’t up 55% like the rest of the market. They’re not up as much because…they were never down as much.

The companies that tanked most from September 2008 to March 2009 were those many thought faced significant bankruptcy risk. When investors realized they wouldn’t go bankrupt (at least, not yet), their prices took off. In some cases, those companies doubled and tripled in price!

Looking forward, such low-quality companies are unlikely to continue out-performing. Significant economic and financial risks still exist, and such companies weren’t exactly healthy to begin with. That’s not the strongest vote of confidence for future returns.

The second reason I think quality companies will out-perform is because they hold all the cards. They weren’t overly indebted to begin with, they had strong market share and superior products, they tend to have excellent growth opportunities due to international markets, they have the financial resources that allows for growth, and they have the management talent to execute.

Add those positives to prices that haven’t really taken off, and you have an ideal situation. When you combine a quality company’s excellent prospects with low historical prices relative to fundamentals, you have a recipe for excellent returns.

As Warren Buffett once said, “If a business does well, the stock eventually follows.” I can’t make any promises about when the quality stocks will follow fundamentals, but I’m very confident it will take place within a 3 – 5 year time horizon.

For those of you interested, I recently reworked my website. I tried to make it more straightforward and my value proposition clearer. Please visit and tell me what you think. I also added my business, Athena Capital, to facebook. Become a fan if you’re so inclined.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.