Friday, May 30, 2014

high quality or low quality?

aren't high-quality stocks superior to low-quality ones by definition? The short answer: not in all market environments. For example, the lowest-quality stocks tended to outperform the highest-quality stocks when the U.S. economy was coming out of recessions.

"There are times when you want to buy low-quality stocks because they've become very cheap," says Sudhir Nanda, head of the Quantitative Equity Group and manager of the Diversified Small-Cap Growth Fund. "In a recession, investors chase safe, defensive stocks; they become more expensive; and low quality becomes cheaper—and so low quality tends to do well coming off the bottom of a market cycle.

But over the long run, it pays to invest in high-quality stocks because you tend to have smaller down moves, so your returns can compound faster.

-- T. Rowe Price Report, Spring 2014

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