High-calibre U.S. stocks identified with a quality factor investment strategy.
The U.S. equity market remains near all-time highs, while the S&P 500 volatility index remains near its 52-week low. A sudden spike in volatility has the potential to make equity markets reverse direction. This week we screened for stocks that could weather a market correction in case volatility starts creeping back into U.S. equity markets by focusing on quality stocks from a factor investing methodology.
Trading Central’s research team utilized a quality factor methodology to pinpoint high-calibre U.S.-listed stocks exhibiting robust financial health and consistent profitability.
The initial step involved setting a minimum market capitalization threshold of US$10-billion. This criterion ensured the inclusion of well-established stocks, which generally present lower risk and volatility compared with small-cap stocks.
Subsequently, we filtered for top-rated stocks based on the TC Quality Factor rating methodology, crafted by Trading Central’s quantitative analysis experts. This methodology assesses a company’s overall financial strength, encompassing profitability, balance sheet robustness and earnings quality. A minimum rating of 75 out of 100 was required for consideration.
Additionally, we focused on companies outperforming the broader S&P 500 index, which has delivered a year-to-date return of just over 17 per cent.
Lastly, to identify stocks with potential upward price trends, we screened for companies trading within 15 per cent of their 52-week high.
We have also included P/E, dividend yield and one-year returns for reference.
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.
Topping our list is electricity and natural gas seller NRG Energy Inc. NRG-N. The company has a low P/E of 11.29, compared with 27.61 for the S&P 500 index. The stock price is trading within 9.61 per cent of its record high on May 28. The stock is tied with Synchrony Financial for the highest TC Quality Factor rating on our list at 90 out of 100. The stock has had impressive year-to-date and one-year price returns of 54.5 and 108.9 per cent respectively.
Wireless technology company Qualcomm Inc. QCOM-Q has the largest market cap on our list at US$233.02-billion. The stock price has pulled back 9.47 per cent from its June 18 high. The stock has a 75 out of 100 TC Quality Factor rating.
NetApp Inc. NTAP-Q, an intelligent data infrastructure company, has the lowest change from its 52-week high, as the stock continues to post new record highs almost on a daily basis over the past month. The stock has a very strong TC Quality Factor rating of 85 out of 100.
Quality factor investing encourages a more rational, data-driven approach to decision-making. These stocks often perform well across economic cycles, provide dividend income and limit losses during market downturns. However, it’s crucial to remember that no investment strategy is entirely risk-free, and the performance of quality factor strategies can vary in different market conditions. Diversification, risk management and a thorough understanding of one’s investment objectives and risk tolerance remain critical elements in achieving investment success.
The investment ideas presented here are for information purposes only. They do not constitute advice or a recommendation by Trading Central with respect to investment in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.
