Friday, July 2, 2010

Grantham on Quality Stocks Revisited

The previous post on high quality stocks reminded me of what Jeremy Grantham had to say back in 3Q 2009.

Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets, a hair-of-the-dog strategy if ever there was one. In our seven-year forecast the quality segment has a full seven-percentage-point lead per year over the whole S&P 500, or 9% over the balance ex-quality. This is now at genuine outlier levels.

In addition, there are qualitative arguments. We like owning high-quality blue chips if we are indeed going into a more difficult seven years than any we have faced since the 1970s. The problems of reducing debt and the potential share dilution that can go with it as it did in Japan for a decade, particularly play to the strength of the largely debt-free high-quality companies.

Though Grantham said this a while back it remains true today.

I just don't expect too much in the short run.

For examples of what Grantham specifically means by "quality stocks" check out the top 25 holdings from one of GMO's mutual funds (GMO is Grantham's investment management firm).

The higher quality stocks historic performance promises nothing about the future but, at least relative to alternatives, this appears not the worst place to focus considering the potential risks and rewards.


Related posts:
Friends & Romans - May 2010
Grantham on Quality Stocks - November 2009
Best Performing Mutual Funds - 20 Years - May 2009
Staples vs Cyclicals - April 2009
Best and Worst Performing DJIA Stock - April 2009
Defensive Stocks? - April 2009
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