An alternative to selling in May is to focus on lower beta high quality stocks whose performance has lagged the lower quality issues over the past twelve months. In a recent report by S&P Capital IQ, Quality and Stability [.pdf], S&P notes the lower quality issues in the S&P 500 Index have outperformed the higher quality ones. In the report S&P summarizes the quality breakdown as of April 17, 2014:
...there were 443 companies the S&P 500 that had an S&P Quality Rank, with 128 (29%) having ranks of A-, A or A+, otherwise known as "above average." Also, there were 169 companies ranked B, B- or C, or "Below Average." Finally, 146 were ranked B+ or "Average."
The significance of the quality ranking is it takes into account the consistency of earnings and dividend growth over the prior ten years. Historically, companies that have a higher consistency in growing their earnings and growing their dividends tend to be less volatile in declining markets. The below table details the average beta of the A- to A= quality ranked stocks versus their counterparts with a rating of B+ and lower.
|From The Blog of HORAN Capital Advisors|
Source: S&P Capital IQ
The report contains a list of twenty companies that S&P screened on quality and Fair Value Ranking that readers may find of interest.
Disclosure: Firm and/or family long CMCSA, CVX, SYK, UTX, QCOM