An Investment Strategy for High Quality Firms

If you are saving for retirement, have some investment goals and are looking to buy stocks we believe this chart is for you.

• Our last two newsletters documented the generational opportunity to buy the highest quality Midcap firms at below average prices, read them here and here, or watch a video summary here
• The chart below brings this concept to the Small Cap investing universe by contrasting the R2000’s High-Quality and Low-Quality firms
• The blue line is the Return on Assets (ROA) of the top 40% of companies, the High-Quality firms, in the Russell 2000 Index since 1978
• The red line is the ROA of the bottom 40% of companies, the Low-Quality firms, in the Russel 2000
• CONCLUSION: The QUALITY spreads between High-Quality firms and Low-Quality firms have only been this wide during the peak of the internet bubble

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Please see our paper early next week where Kailash drills into this issue with greater detail and provides the most actionable ideas. Investors can buy the highest quality firms in the R2000 at record value spreads to the index. For those who know to avoid the crowds chasing stocks that are growing sales fast at the expense of profits and are interested in mispriced growth, please see our work on GARP stocks.

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When High Quality Is Low Priced We Smell Opportunity!

Like our research on Income Investing and The Case for Buying What you Know and Need, our next paper documents that today, like the peak of 2000, the valuation spreads between high and low-quality firms is at record wides. If you are looking for actionable ideas on how manic markets characterized by the reckless gambling in GameStop is creating fantastic opportunities to buy high-quality firms with healthy dividends and income at reasonable prices, please contact [email protected].

The KCR research team has been navigating bull and bear markets successfully for decades. We believe today many folks believe they are suddenly brilliant growth investors. The short-term gains from those who actively trade the stock market in periods when stock prices seem to go straight up always feel good.

Unfortunately, we believe that many speculators have forgotten the basics around risk tolerance as share prices of many “growth stocks” explode higher. We also believe the crowd has come to believe that they can time the market. When things are going well the boring basics like dollar cost averaging and asset allocation go out the window.

We are big believers in growth investments. Our first White Paper The Siren Song of Growth, published well over a decade ago, showed a simple way to work in the growth universe. At the same time, however, we encourage investors to check out our work How to Build a Growth Stock 1999 & Today.

In that piece, we document the frightening analogs between many of today’s most popular stocks with those in 1999. Overall, we believe that there are terrific investment programs available in everything from mutual funds that follow disciplined and proven methods to our own work on buying high quality at reasonable prices.

KCR embraces a disciplined quantamental investment process. To see that process in “action” on a couple small caps we encourage readers to review our free posts on the possible opportunities we see in MHK’s stock and Hillenbrand’s stock. In those pieces you can see how we take the market’s reckless multiple expansion in a small number of story stocks and use it to find inexpensive stocks offering growth at a reasonable price.

Another great compare and contrast can be seen by reading our post advocating for investing in the best credit card stocks….and then reading and contrasting that work with our post on the ARKF dividend vs XLF Dividend. We think the opportunities and risks are obvious but obviously this is not individual financial advice, everyone should do their own work and consult with a financial advisor to make sure any investment decisions are appropriate before moving forward.

Please scroll through our extensive and growing library of CHARTS that documents both the risks and opportunities we see in markets today. Many of these posts will have links to relevant content that you might find of interest. After one of the longest bull-markets in US history, markets have eclipsed valuation levels last seen in the dot.com mania and we believe having a bear market trading strategy is almost a forgotten art. As always, we encourage tentative or new subscribers to reach out for a brief consultation with one of our product specialists.