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S&P Capital IQ Publishes Quality Trends, An In-depth Analysis Of "quality" In The Equity Markets


NEW YORK, May 24, 2012 /PRNewswire/ -- S&P Capital IQ Equity Research believes that U.S. stocks continue to be in an extended bull market likely to carry indices to record highs, although it also expects significant bumps along the road, according to the latest issue of the group's Quality Trends publication. 

"We believe the early bull market of strong low Quality Ranking* (QR) outperformance is over, as many low Quality issues have become more fully valued," said Richard Tortoriello, an S&P Capital IQ equity analyst and author of the report. "We project relatively balanced performance between high and low Quality Ranking issues going forward."

The report includes three different back-tested portfolio strategies:

  • The EBIT (Earnings Before Interest and Taxes) to invested capital and free cash flow to price strategy.  The strategy looks for what are believed to be highly profitable companies that are selling at low valuations relative to current cash flow. 
  • A variation on the "sell in May and go away" adage, which we adapt as "sell cyclicals in May and buy defensives."
  • A dividend-based strategy that focuses on companies that have had three-year increases in dividends and relatively low valuations, on an enterprise value to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) basis.

The report also reviews International Quality Rankings (IQR), for the first time providing an extended performance history (1997-2011), a list of A+ IQR companies, and a high IQR screen based on return on equity and price to book.  The study also provides statistical data on the fundamental characteristics of high IQR companies:  sales, debt, profit margins, and return on equity.

One of the screens in the report shows A+ ranked top performers for the 12 months ended March 2012 ranked in terms of total return.  All stock prices are closing prices on May 21, 2012.  The stocks identified by this screen are:  Church & Dwight (NYSE: CHD, $53); CVS Caremark (NYSE:  CVS, $45); International Business Machines (NYSE: IBM, $198); Lorillard (NYSE:  LO, $126); Nike (NYSE:  NKE, $107); Ross Stores (NASDAQ:  ROST, $60); TJX Companies (NYSE:  TJX, $40); UnitedHealth Group (NYSE: UNH, $56); WW Grainger (NYSE:  GWW, $189); and Yum Brands (NYSE:  YUM, $69)

* S&P Capital IQ Equity Research defines high Quality Ranking issues (high QR) as those with S&P Quality Rankings of A+, A, or A- and low Quality Ranking issues (low QR) as those with S&P Quality Rankings of B, B-, C, or D.  Companies with a B+ Quality Ranking are considered average.  S&P Quality Rankings, also called S&P Earnings & Dividend Rankings, have been published since 1956.

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