Support quality stock with balance sheet power than high profitability – JPM

While driving numbers, JP Morgan Quant has divided their quality stock baskets into two different groups: those who have a strong balance and those who have high profitability, and they mark that the prospects for the first look much brighter.

Post-GFC, quality stock has enjoyed a bull market which is driven by themes such as low volatility, secular growth and ESG.

“However, because these stocks are valued, they have become more risky (higher beta/ volatility), with high market capitalization stocks in the US & Europe also benefited from passive flow.”

And enlarged, quality stock with a strong balance sheet now looks like a better bet, because of post-statement encouragement for sales and profitability in the middle of high inflation may be in the rearview mirror, Quants said.

“Trading with premiums (18.1x PE), (high profitable quality shares) face the sharp and higher beta of EPS cuts,” they wrote.

Conversely, the quality stock of “balance sheet power” has an increase in income expectations and assessment advantages when they trade around 16.7x PE, brighten their views.

“The sloping sector supports staples and health care for the strength of the balance sheet, while high profitability is inclined to industry and technology.”
Source: Reuters (Lucy Raitano)