Grantham. Greenblatt See Value in 'Quality': 10 Guru Strategy Stocks

In the past week, two of the most successful gurus I follow — GMO’s Jeremy Grantham and Gotham Capital’s Joel Greenblatt — have said that they are seeing a lot of value in “high-quality” stocks, as opposed to the junk-type stocks that have led the recent market surge.

In his third-quarter letter, Grantham says that U.S. “quality stocks (high, stable return and low debt)”, are now trading at “genuine outlier levels” compared to the rest of the market after the junk rally. “In our seven-year forecast the quality segment has a full seven-percentage-point lead over the whole S&P 500, or 9% over the balance ex-quality,” he says.

Greenblatt, meanwhile, told Yahoo TechTicker that his “magic formula” approach seems to be finding more values in high-quality stocks than in junk-type stocks

With Grantham and Greenblatt’s comments in mind, I scoured my database for stocks that pass one or more of my “Guru Strategies” (each of which is based on the approach of a different investing great), and which could also be considered “high quality," using Grantham’s definition as a basis. Among the specific criteria I used to define “high quality”:

• earnings per share have increased in each year of the past five-year period, with average annual EPS growth of at least 10%;
• a current ratio (current assets/current liabilities) of at least 2.0, to target stocks with good liquidity;
• debt/equity ratios no greater than 40%;
• market caps of at least $250 million, and share prices of at least $10, to focus on better-known firms.

Here are ten of the top stocks that meet all those criteria:

Comments

[User 500771:]

I don't believe these stocks are what Grantham has in mind. Stocks like PEP, JNJ, PG are more to his liking. Large, low debt, multi-nationals. Certainly not small OTC and retailers.

Nov 01 08:57 AM

[Old Trader:]

I have to agree with User 500771. I too, was surprised at the number of retailers on the list. I will say, however, that I've heard the both ARO and BKE are currently doing much better than their peers in retail.

Nov 01 09:09 AM

[LaChic:]

aside from SQM, the rest I would not touch...sqm should be bought on weakness, sqm is a fertilizer company in chile and one of the largest producers of lithium, this company basically dictates the prices of lithium.

Nov 02 08:05 AM

[ari5000:]

not much growth on the list.

probably will get a whole lot cheaper during the correction phase.


Magic Formula screen is one of those systems like Dogs of the Dow which has had its day. Now it's just a broken system that will deliver good but not beatable results going forward.

Nov 02 09:24 AM

[DanielMiller:]

I'm with you all the way on JOSB, EZPW, NVO and BKE. Each of them score very well in my fundamentals screener this month. BKE and EZPW look to be trading at the best discounts.

Nov 02 11:27 AM

[buyitcheap:]

I too have to vote for EZPW - I have owned it sold it, and regretted selling. I hope it will pull back a little bit on its earnings report on the 5th, but it is a very nice niche (it's competitors are interesting too), fantastic balance sheet and cash flow.

Nov 04 08:13 AM