Markets

5 High Quality Stocks to Beat Market Turmoil

The U.S. economy is on firmer footing with an accelerating job market, improving housing market, increasing consumer confidence and rising economic activities. Yet the stock market is caught in a web of uncertainty that has little chance of clearing up in the months ahead.

The main culprit is the relentless slowdown in China, which is showing no sign of a recovery. Last month, the surprise devaluation of the Chinese currency, renminbi, again raised worries over another currency war and global trade. The move not only accelerated the slump in commodities and emerging market currencies but also led to a wave of intense selling in stocks across the globe. Additionally, bouts of negative news out of China have kept investors wary.

In fact, the International Monetary Fund (IMF) expects the China slowdown to have bigger-than-expected repercussions in other countries, raising questions over the health of the global economy. Further, sluggish European and Japanese growth, weakness in key emerging markets, sliding oil prices and rising interest rate concerns have added to the woes. Amid these uncertainties, investors are looking to recycle their portfolio and nothing seems better than quality investing at present.

Why Quality Investing?

Quality stocks are generally rich in value characteristics and focus on high quality scores based on three fundamentals - high return on equity, stable or rising year-over-year earnings growth and low leverage. This approach seeks safety and protection against volatility in turbulent times. Notably, quality stocks have both growth and value attributes.

Academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. More importantly, these stocks generally outperform in a crumbling market.

How to Pick Quality Stocks?

While it is hard to assess the quality of the stocks, we have tried to spot them using our Zacks Stock screener . In the process, we have screened a number of metrics. First, we have selected stocks with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Then we narrowed down the list by screening through the following metrics:

1. ROE of at least 10%

2. Debt-to-Equity ratio of less than 1

3. Historically positive 5-year EPS growth

4. Current year positive EPS growth

5. Current year earnings estimate revision on the rise over the past one month

6. Dividend yield of greater than 1%

Below are five high-quality stocks that have an excellent earnings record and a strong balance sheet and could hold up well during market swings.

Tesoro CorporationTSO

One of the largest independent refiners and marketers of petroleum products in the United States, Tesoro boasts a track of above-average earnings growth of 21.4% over the past 5 years. This trend is likely to continue with an expected 74% earnings growth for this fiscal year. The stock has seen solid earnings estimate revisions of 35.3% over the past 30 days for the current fiscal year.

From a balance sheet perspective, Tesoro has lower debt with debt-to-equity ratio of 0.52 while return on equity (ROE) is high at 18.9% - above the industry average of 15.6%. Additionally, it yields 2.17% in annual dividend. The stock has a Zacks Rank #2 and a solid Zacks Industry Rank in the top 15% (read: 3 Reasons Value Stock Investors Will Love Tesoro Corporation ).

Cooper Tire & Rubber Co.CTB

This Zacks Rank #1 company is engaged in the manufacture and marketing of replacement tires worldwide. It is the fourth largest tire manufacturer in North America and the eleventh largest in the world. The company has seen solid earnings estimate revision of 11.2% for the current fiscal year over the past 30 days and is expected to grow at an annual rate of 20.4%, much higher than the five-year historical average of 7.8%.

Debt-to-equity ratio of the company is just 0.31 while return on equity (ROE) is high at 18.9%, above the industry average of 15.8%. The stock has an annual dividend yield of 1.12% and a top Zacks Industry Rank (read: How Cooper Tire & Rubber Stock Stands Out in a Strong Industry ).

Kforce Inc.KFRC

Kforce is a global professional staffing services firm that matches the requirement of job seekers with that of employers in the specialty skill areas of technology, and finance & accounting. The company's earnings growth was a stellar 30.5% over the past five years and is expected at 55.7% year over year for 2015. The company has seen an upward earnings estimate revision of 7.04% for the current year over the past 30 days.

Further, the company has a strong balance sheet with ROE of 24.3% versus the industry average of 13.5% and debt-to-equity ratio of 0.68. It has an annual dividend yield of 1.65%. The stock currently has a Zacks Rank #1 and Zacks Industry Rank in the top 16%, indicating its high quality.

Ritchie Bros. Auctioneers Inc.RBA

As the world's largest auctioneer of heavy equipment and trucks, Ritchie Bros. has a good track of 11.1% earnings growth over the past five years and expects to grow 23.7% year over year this fiscal year. Earnings estimate revisions for the current year has gone up by 6.4% over the past 30 days.

The company's debt-to-equity ratio of 0.08 is one of the lowest in the industry and ROE of 16.9% is also good. The company has 2.39% in annual dividend yield. The stock has a Zacks Rank #1 and a superb Zacks Industry Rank in the top 2%.

Alaska Air Group Inc.ALK

This Zacks Rank #2 company provides passengers and cargo air transportation services primarily in the United States. It has seen positive earnings estimate revisions of 1.6% over the past one month with an expected growth rate of 50.6% for this year. The company has grown nearly 25% over the past five years and ROE is currently 32.2%, higher than the industry average of 20.05%.

The stock yields 1.02% in annual dividend and has debt-to-equity ratio of 0.28. Further, Alaska Air Group has a solid industry rank in the top 15%.

Bottom Line

Quality stocks often provide hedge against market volatility, which has intensified due to the China-led deceleration fears. Adding any of the above-mentioned stocks to one's long-term portfolio could be worthwhile thanks to their credit worthiness and soundness. Further, the current market correction is a great time to buy the high-quality names at an attractive price.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

TESORO CORP (TSO): Free Stock Analysis Report

COOPER TIRE (CTB): Free Stock Analysis Report

RITCHIE BROS (RBA): Free Stock Analysis Report

KFORCE INC (KFRC): Free Stock Analysis Report

ALASKA AIR GRP (ALK): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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