Quality and growth stocks: Investing for good times and bad
From a risk-free rate to "interest-free risk": Investors ought to be able to rely on a resilient and sound portfolio, particularly in uncertain times. A combination of quality stocks and growth stocks is a good place to start.
Quality stocks and growth stocks offer attractive investment opportunities
It's time for a change. Before the financial crisis, investors were abuzz with talk of a risk-free interest rate – and thus a gilt-edged investment. Since then, however, "interest-free risk" has been the hot topic. Risk has certainly paid off for many investors, with equity market prices hitting unprecedented levels in the meantime. To a certain extent, though, the outbreak of the coronavirus pandemic can be regarded as a paradigm shift: The year 2020 was characterized by high volatility and portfolios that, in some cases, were hit hard. The cause of this was perhaps the fastest economic downturn in history. The sudden disturbances gave many investors little time to respond to the changes in the market.
There is no sure-fire protection from market-related risks. That being said, high-quality companies have proven to be surprisingly resilient. This is due in no small part to their strong cash flow generation and solid balance sheets. Companies with these features are well positioned to hold their own throughout the entire business cycle.
For instance, quality companies achieve their resilience and stability through disciplined capital allocation and benefit from larger profit margins as well as less revenue volatility. This allows them to obtain better results than their competitors over the course of the business cycle, which is also reflected in higher stock valuations. On a forward price-to-earnings basis, quality stocks trade at a multiple of 23.6x compared to the global benchmark’s 18.6x.
With a price-earnings ratio of 28.6, growth stocks have even larger valuation premiums than quality stocks. They also focus more heavily on increasing profit and sales, which in turn means greater risks. Careful analysis of companies in both segments is essential.
Quality and growth stocks are suitable even in uncertain times
Diversified portfolios of companies that have both quality and growth characteristics – and thus offer stability as well as growth – have fared well even in uncertain times. These companies generally have time-tested business models, and they grow faster than their competitors. Accordingly, quality and growth stocks have performed disproportionately well over the past two decades. On top of that, the financial crisis particularly revealed that quality stocks needed half as long as the broad benchmark (778 days) to climb back to their highs after the collapse of the equity markets. So far, they have also outperformed the broader benchmark during the coronavirus pandemic. Both facts are striking illustrations of the resilience and return opportunities found in quality growth companies.
Selection is what counts: Using HOLT to build a good portfolio
HOLT is useful for identifying companies with quality and growth characteristics that are trading at reasonable valuations: Credit Suisse's proprietary assessment tool allows for systematic stock valuations based on multiple criteria with an emphasis on company cash flows. This makes it easier to compare multiple sectors and countries, and it helps investors to obtain a thorough assessment of each company and to ensure consistent returns.
The Credit Suisse Quality Growth Index uses these investment principles to build a unique portfolio of quality growth stocks. It focuses on companies with above-average cash flow generation and growth prospects. More than 20,000 stocks serve as the starting point for its rule-based, systematic screening approach. The certificate gives investors access to the index as well as daily liquidity, complete transparency regarding performance, and detailed monthly reporting.