How to search for quality stocks

The website of GMO is very educational and useful for all investors. There are two wonderful article called: Profits for the long run: affirming the case for quality  and The Case for Quality: The Dangers of Junk there which gives useful ideas to search for high quality companies.

The definition of quality companies according to them is-

  1. High profitabilty – measured by the return on equity(ROE)
  2. Low profit volatility –  low earnings volatility= low standard deviation of yearly increases in earnings
  3. Low leverage- measured by the debt/equity ratio(D/E)

So, take any index or group of stocks and sort them into 4 quartiles( 25% each). You might also want to remove financial companies and banks.Choose the top quartile. Choose the companies that are there in the top quartile of the above 3 criteria.That is your high quality stock group. You might then want to analyse these stocks and invest or invest in the whole group.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s