Sunday, January 07, 2007

Equity Performance by Quality Ranking

In this week's Market Watch section of Barron's, Harris Private Bank CIO, Jack Ablin notes:

"The most dominant theme among [S&P 500] investors last year was quality, or lack thereof. The 76 issue rated B-minus or less gained in excess of 20% on average in 2006, while the 98 names ranked A and above picked up roughly half as much. A-plus issues gained less than 10% for the year. Interesting to note, the quality trend has reversed over the last month, with A-plus issues up over 3%, compared to C-rated selections edging 1% higher. This is a trend that bears watching.

Dividend yield was another favorite among investors last year. Stocks in the highest yielding quintile of the S&P 500 gained over 21%, while non-yielding issues trailed the market, picking up 13%. Most recently, the dividend theme has only strengthened. Last month, the highest-yielding names gained 2.5%, while non-yielding stocks picked up less than 1%.

Looking ahead, liquidity will continue to be a favorable backdrop for stocks this year, although profit growth and margin compression will emerge.

Dividends should continue to curry investors' favor, while there will be a gradual shift toward growth-oriented sectors, like health care and eventually technology. Slowing profits will be offset by P/E expansion. We expect the S&P to gain roughly half as much this year as last." Jack A. Ablin

Handicapping Quality ($)
Barron's Market Watch
Edited by Anita Peltonen
January 8, 2007

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