In his latest article from GMO, Ben Inker argues that higher quality deep value stocks are currently very cheap and a great investment opportunity. Here’s an excerpt from the article:
There is no lack of academic literature on quality and related topics, and my apologies to any whom I’ve offended by not citing a particular paper.
I can’t claim to have read everything, but I can say that I have yet to come across anything particularly persuasive as to why the anomaly exists.
The lack of credible explanations as to why high quality “should” outperform demands that we be alert to the fact that this might change in future.
We aim to take a “trust but verify” stance with regard to our investment beliefs at GMO. It is dangerous to assume that the circumstances that caused your favored securities to be attractive still pertain.
In the case of the quality anomaly though, the plausible change in circumstance almost certainly needs to involve investors bidding up the valuation of higher quality securities and bidding down the valuations of low-quality ones to the point where the fundamental advantages of high-quality companies are fully counteracted by their higher valuations.
As long as we see no evidence that this has already occurred, a move to that efficient pricing actually constitutes an upside opportunity for higher quality stock and BB bond holders, since getting there involves a windfall gain for high-quality securities as their valuations rise.
As a result, the case for building in a quality bias to your stock and high yield credit portfolios is extremely strong.
Even today, at a time where we in the Asset Allocation team believe that deep value stocks are the best opportunity in equity markets, we see no need to compromise on quality to take advantage of the value mispricing.
Higher quality deep value stocks are as cheap versus their history as more standard ways to define deep value are, making them an even more compelling buy in our view. But whether or not you agree with me about today’s value opportunity, I can’t imagine why any investor wouldn’t want to find a way to bias their equity and high yield portfolios in favor of high quality.
You can find the entire article here:
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:
