An Alternative To Selling In May

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 |  Includes: BXDB, BXUB, BXUC, EPS, IVV, RSP, RWL, SDS, SFLA, SH, SPLX, SPXL, SPXU, SPY, SSO, TRND, UPRO, VOO
by: David I. Templeton, CFA

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
Click to enlarge

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