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.

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