Yahoo Finance Ten quality stocks to watch in 2015
Twelve months ago investors were reflecting on a year that saw many small and mid cap shares leap in price. Momentum and value strategies proved to be big winners, while quality stocks were often left lagging. But at the time it was starting to look like strong financial quality could play a much more influential role in 2014. After all, if frothy share prices were being driven by expectations of continuing earnings growth, any stock that dared to disappoint was at risk of being hit hard.
As it turns out, that was a fair assessment. Across the market this year, earnings fails have forced down prices. Just look at previously popular stocks like ASOS, down 59%, and Xaar, down 76%. There were times during earnings season when the number of small and mid cap profit warnings felt relentless. Meanwhile the 'junk' end of the market has been heavily marked down too, with pre-revenue oil and mining stocks being decimated.
Picking safer stocks
At the time of last year's Santa rally (which kicked off in early December) we took a look at mid-cap stocks that were perhaps best placed to withstand a fall in investor sentiment. Taking a similar approach to the likes of Joel Greenblatt and Warren Buffett, we went hunting for shares with the best combinations of value and quality. We did that using Stockopedia's Quality + Value (QV) Crossover Rank (subscribers can see the current screen here). As the name suggests, this rank pairs stocks with the best blend of attractive value and financial quality across a range of measures.
Topping the mid-cap list at the time was transport operator Go-Ahead Group, investment specialist Intermediate Capital, oil group Soco International, IT firm Micro Focus International and support services company Interserve.
As you can see from this table, the price performances of all five stocks over 12 months have been extreme. The falling oil price has dented already weak sentiment towards resource companies, which has been painful for Soco. But two 50% gainers in Go-Ahead and Micro Focus mean that the average return from this small basket of quality, value stocks was 13.8% over the year, excluding dividends. Not bad considering that the FTSE 250 is up just a couple of percent.
Company | QV Rank 12/2013 | Price change |
98/100 | +50.1% | |
96 | +48.9% | |
98 | +8% | |
96 | -5% | |
97 | -32.8% |
From a broader perspective, the chart below shows how all three StockRank Crossovers have performed since early January 2014. It tracks stocks with a market cap of more than £350 million and a rank of higher than 95%. As it turned out, Quality & Value (5.5%, blue line) has just beaten Value + Momentum (3.1%), and both those approaches have outperformed the FTSE All Share (-1.2%) and Quality & Momentum (-5.1%).
The past, of course, is absolutely no guide to the future. But out of interest we've had a look at the current list of top ranked mid-cap QV stocks that might be worth watching in 2015.
Heading that list is long-time investor favourite Dart. The airline and logistics operator has regained its composure after suffering a sharp fall in price earlier this year. It's worth noting that Dart has long been one of the highest ranking stocks in the market for its quality, value and momentum. A profit warning in June caused the momentum to slump but the recovering price has helped the share regain one of the best StockRanks in the market, at just short of 100, and just ahead of motor dealer Lookers.
Interestingly, Dart isn't the only high ranking QV stock here to have issued a profit warning this year. Communications testing company Spirent Communications and outsourcing company Mears have both slumped on warnings, while oil services company Hunting has also been hit hard on negative news. The high QualityRank scores of these companies may offer a signal of their financial strength to withstand operational bumps and eventually bounce back in price. But that's far from certain - so your own research is essential.
Other industrials on the list are construction group Keller and engineering firm Vesuvius, while iron ore producer Ferrexpo is the only mining stock. Despite a reasonable financial performance this year, Ferrexpo's share price has fallen by 61%, largely as a result of the geopolitical risk of operating in Ukraine. In tenth place is residential property trading company Mountview Estates, which is a stock that has actually risen strongly in recent months, but is also relatively illiquid.
Name | Mkt Cap £m | Stock Rank™ | QV Rank | Quality Rank | P/E | Yield % |
425.6 | 100 | 99 | 97 | 13.4 | 1.00 | |
520.4 | 99 | 98 | 94 | 11.9 | 2.00 | |
411.4 | 80 | 97 | 97 | 14.3 | 6.69 | |
824 | 77 | 97 | 90 | 12.9 | 3.56 | |
380.8 | 68 | 97 | 82 | 1.70 | 6.51 | |
855.6 | 95 | 97 | 94 | 13.9 | 3.18 | |
373.4 | 72 | 97 | 95 | 17.0 | 2.48 | |
597.9 | 89 | 96 | 89 | 11.5 | 2.91 | |
1,167 | 84 | 96 | 87 | 7.94 | 3.54 | |
370.9 | 96 | 96 | 94 | 10.8 | 2.63 |
2014 certainly hasn't offered the sort of index-wide price surges that were seen last year. But there have been some good individual performances in otherwise underwhelming conditions. It's pleasing (albeit unscientific) that a snapshot of companies ranking the highest for quality and value one year ago produced a very positive overall result. There's no certainty that will happen again next year - but we'll be sure to review it. After all, quality and value are the hallmarks of some of the world's most successful investors.
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