Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets, a hair-of-the-dog strategy if ever there was one. In our seven-year forecast the quality segment has a full seven-percentage-point lead per year over the whole S&P 500, or 9% over the balance ex-quality. This is now at genuine outlier levels.
Jeremy Grantham later added...
In the long run, quality stocks have proven to be the one free lunch: you simply have not had to pay for the privilege of owning the great safe companies, as plain logic and established theory would both suggest.
For examples of what Grantham specifically means by "quality stocks" check out the top 25 holdings from one of GMO's mutual funds (GMO is Grantham's investment management firm). The fund has an intuitive name: GMO Quality (GQETX).
As of 5/31/09 top holdings of the fund include the likes of Coca-Cola, Johnson & Johnson, Chevron, Wal-Mart, Pepsi, Cisco, Microsoft, Procter & Gamble, and Google.
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