10 High Quality U.S. Stocks From GMO

by: MyPlanIQ

GMO is well known for its seven-year asset class performance forecast. Even before the financial crisis, the firm emphasized quality stocks. Since the recovery, it's put even more weight on quality U.S. stocks while being very cautious on other asset classes, even on emerging market stocks that it used to be more optimistic about. Given what is unfolding right now in the market, GMO's emphasis on high quality U.S. stocks would serve its funds well.

We looked at the top 10 holdings on GMO Quality IV (GQEFX). This fund seeks to investment in equities the manager believes to be of high quality. It should also be noted that the fund is permitted to invest in equities in any country in the world, including emerging countries. The fund is not diversified.

The following are the top 10 stocks, as of May 31.

Company Symbol % Assets
Johnson & Johnson Common Stock JNJ 5.90
Philip Morris International Inc PM 5.55
Microsoft Corporation MSFT 5.20
Oracle Corporation ORCL 4.90
Pfizer, Inc. Common Stock PFE 4.45
Cisco Systems, Inc. CSCO 4.41
Coca-Cola Company (The) Common KO 4.00
Wal-Mart WMT 3.46
Apple AAPL 3.26
Exxon Mobil Corporation Common XOM 3.19

We can see these stocks are from consumer staples, technology and healthcare. Consumer staples and healthcare stocks are traditionally considered to be defensive. Technology stocks are different this time; they have better balance sheets and steady revenues, thanks to their globalization at two ends: Cost-wise, they outsourced to emerging market, lowering manufacturing and R&D costs; revenue-wise, their international market presence help them increase sales dramatically, even though domestic sales are very anemic.

Here are the cash holdings for the four technology stocks.

Oracle 28.8 Billion
Microsoft 51 Billion
Cisco 43 Billion
Apple 76 Billon

It was also widely reported that Apple had more cash than the U.S. treasury after S&P downgraded the U.S. debt rating. Though this was of more entertaining value, it did point out how much cash these companies right now are holding.

The following table shows some of characteristic of these holdings:

Averages GQEFX Large Cap Avg
Dividend Yield % 2.84 1.95
Price/Earnings 13.45 12.97
Book Value Growth 5 -0.56
Price/Book 3.03 2.14
Price/Sales 1.67 1.45
Price/Cashflow 9.62 8.16
3 Year Earnings Growth 12.73% 8.16%

Even though they are not cheap -- they have slightly higher P/E, P/B and P/S -- their earnings growth and book value growth are way above the norm. Furthermore, their 2.8% yield is much better than the large cap average of 1.95%.

Let's see how the top holdings have done by comparing this fund with two diversified dividend ETF portfolios.

Portfolio Performance Comparison

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Strategic Asset Allocation Risk Profile 0 3% 28% 2% 8% 3% 8%
GQEFX 12% 198% 2% 25% 2% 17%
Retirement Income ETFs Tactical Asset Allocation Risk Profile 0 7% 45% 14% 70% 13% 62%

Portfolio Compare Link

Three-Year Chart

[Click to enlarge]

From the above, one can see that the holdings outperformed the diversified ETF portfolios in the last year, even though it lacked a bit for the last five years.

The takeaway is that equity investors can look at the top 10 stocks as their long term holding candidates. The large U.S. multinationals that have strong brands and pristine balance sheets will do well in this coming balance sheet recession or slowdown.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.