In this piece, we will take a look at the 12 best quality stocks to buy now. If you want to skip our analysis of stock quality and want to jump ahead to the top five stocks in this list, then take a look at the 5 Best Quality Stocks To Buy Now.
When it comes to analyzing stocks, there are a myriad of tools available to professional and retail investors. Two of the most popular approaches are value investing and growth investing. Both of these are widely used, and starting from value investing, it simply involves analyzing stocks that have the potential to appreciate in the future. A stock's value is typically defined by several metrics such as its price to earnings ratio and its fair value. The former measures the premium that the market is paying over a firm's ability to earn profit and the latter is a subjective analysis that factors in future cash flows and business operations to wager a guess at the stock price. The higher the fair value, the safer an investment is and the less margin exists for making a loss if a buying decision is made.
Growth stocks, on the other hand, have high P/E ratios. This is because investors expect their share price to significantly appreciate in the future based on market advantages and technological strengths among other factors. Therefore, they are willing to pay higher share prices now with the hope that future earnings growth will also push the share price up.
One approach that receives less attention when compared to growth or value investing is Quality Investing. While the former two have defined metrics that make for easy classification, quality stocks are much harder to define. Despite this, there are dozens of quality factor ETFs that are operated by different entities. Some of the biggest quality factor ETFs in terms of total assets are iShares MSCI USA Quality Factor ETF (BATS:QUAL), iShares MSCI Intl Quality Factor ETF (NYSE:IQLT), and Invesco S&P 500 Quality ETF (NYSE:SPHQ). Each of these has different criteria for stock selections, and as you might have guessed, they also target different stock indexes.
So, it's clear that we'll have to turn elsewhere to see what stock quality is all about. One place where we might find answers is academia. On this front, a research paper from 2017 takes a look at several signals that are used by investors to measure stock quality. The researchers, associated with Research Affiliates, LLC, used three primary criteria to measure quality. These consider whether a quality factor has been previously discussed in academia, a steadfastness against shifting definitions, and a globally agnostic impact on stock performance. They also analyzed quality factor indexes and narrowed down seven metrics that are typically defined as a quality indicator. These are profitability, earnings stability, capital structure, growth, accounting quality, shareholder payouts or stock dilution, and investment strategies. Then, the researchers checked which of these factors were actually leading to return premiums and found that profitability, accounting, payouts, and investment strategies were the ones that made the final cut.
Another take on what really makes a stock a quality stock comes from Cliff Asness' AQR Capital Management. AQR is one of the biggest hedge funds in the world, and Insider Monkey's research shows that as of Q3 2023 end, the firm's investment portfolio was worth a whopping $8 billion. According to AQR, quality stocks generally have higher prices, and it points out that an investment strategy called Quality Minus Junk has the potential to deliver high returns in both the U.S. and abroad. This approach sees an investor use a long/short approach, to go long on quality stocks and short the others.
The QMJ strategy is part of a research paper written by Mr. Asness himself, and it defines Quality as conditional on a firm's profitability, growth, safety, and shareholder payouts. For what it's worth, AQR's top stock picks during the third quarter were Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG). Analyzing them with respect to Mr. Asness' formula, all these firms are profitable, they continue to deliver growth despite bringing in billions in revenue, are safe due to fortress balance sheets, and regularly pay dividends. For more details on AQR Capital Management, you can check out AQR Capital Management: AUM, Performance, Stock Picks.
So, what are these quality stocks that everyone loves to talk about? We took a look and some notable names are Meta Platforms, Inc. (NASDAQ:META), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOGL).
12 Best Quality Stocks To Buy Now
Photo by Kai Wenzel on Unsplash
Our Methodology
To compile our list of the best quality stocks, we used the top 30 holdings of the iShares MSCI USA Quality Factor ETF and ranked them by the number of hedge fund investors that had bought the shares during Q3 2023. Out of these, those with the highest number of investors were chosen as the best quality stocks.
Merck & Co., Inc. (NYSE:MRK) is one of the biggest and oldest healthcare companies in the world. It marks a strong start to our list of the best quality stocks to buy since not only has the firm beaten analyst EPS estimates in all four of its latest quarters but the shares are also rated Strong Buy on average.
During this year's September quarter, 85 out of the 910 hedge funds profiled by Insider Monkey had held a stake in Merck & Co., Inc. (NYSE:MRK). Ken Fisher's Fisher Asset Management owned the largest stake among these which was worth $1.3 billion.
Broadcom Inc. (NASDAQ:AVGO) is a semiconductor company that designs and sells products such as modems. November was an important month for the firm since it finally managed to close its $69 billion dollar acquisition of the cloud computing company VMWare.
Insider Monkey's third quarter of 2023 survey covering 910 hedge funds revealed that 87 were the firm's investors. Broadcom Inc. (NASDAQ:AVGO)'s biggest investor in our database is Ken Fisher's Fisher Asset Management due to its $1.7 billion investment.
Broadcom Inc. (NASDAQ:AVGO) joins Microsoft Corporation (NASDAQ:MSFT), Meta Platforms, Inc. (NASDAQ:META), and Alphabet Inc. (NASDAQ:GOOGL) in our list of the best quality stocks to buy.
Eli Lilly and Company (NYSE:LLY) is a global pharmaceutical giant. It scored a big win in the big pharma fight for weight loss drugs in November 2023 when a study conducted by a health data company showed that Eli Lilly and Company (NYSE:LLY)'s Mounjaro beat Novo Nordisk's rival drug Wegovy.
During Q3 2023, 102 out of the 910 hedge funds part of Insider Monkey's database had invested in Eli Lilly and Company (NYSE:LLY). Ken Fisher's Fisher Asset Management was the largest shareholder since it owned 4.4 million shares that are worth $2.3 billion.
UnitedHealth Group Incorporated (NYSE:UNH) is an American healthcare plan and coverage provider. It's another mega stock that has beaten analyst EPS estimates in all four of its latest quarters and is rated Strong Buy on average.
For their September quarter of 2023 shareholdings, 104 out of the 910 hedge funds surveyed by Insider Monkey had owned a stake in the company. UnitedHealth Group Incorporated (NYSE:UNH)'s biggest hedge fund investor is Rajiv Jain's GQG Partners courtesy of its $1.6 billion stake.
Adobe Inc. (NASDAQ:ADBE) is a software company that sells design and productivity products to professional and general users. The firm made a slash with its Black Friday sales data in November 2023 when it pointed out that sales could exceed a whopping $12 billion.
By the end of this year's third quarter, 112 out of the 910 hedge funds covered by Insider Monkey's research had bought Adobe Inc. (NASDAQ:ADBE)'s shares. Out of these, the largest investor was Ken Fisher's Fisher Asset Management as it owned $2.3 billion worth of shares.
Apple Inc. (NASDAQ:AAPL) is the world's biggest personal computing and technology company. Over the years, the firm has built a multi-billion dollar Services portfolio, and one of its services, Apple Pay, is facing increased regulatory scrutiny in Australia.
For their September quarter of 2023 shareholdings, 134 out of the 910 hedge funds tracked by Insider Monkey were the firm's investors. Apple Inc. (NASDAQ:AAPL)'s biggest hedge fund shareholder is Warren Buffett's Berkshire Hathaway due to its massive $156 billion investment.
Mastercard Incorporated (NYSE:MA) is a financial products and services provider, known for its digital payments platform. The shares are rated Strong Buy on average, but the average share price target suggests a slightly overvalued stock.
140 out of the 910 hedge funds tracked by Insider Monkey had held a stake in Mastercard Incorporated (NYSE:MA) during Q3 2023. Charles Akre's Akre Capital Management was the largest investor as it owned a $2.3 billion stake.
Mastercard Incorporated (NYSE:MA), Meta Platforms, Inc. (NASDAQ:META), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOGL) are some top quality stocks that hedge funds are buying.
