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