Adding Quality to Your Portfolio with Quality Stocks

What exactly are quality stocks? Well, they are exactly what they sound like - shares of companies that boast high and stable profit margins. These stocks provide insulation from potential losses in the event of a sales downturn. Some of these companies operate in stable sectors where revenue remains steady even during economic hardships. Others have established brands that allow them to explore new avenues for growth. A key advantage of many quality stocks is their healthy balance sheets, offering financial stability and eliminating the need for fundraising - especially advantageous during times of high interest rates. It comes as no surprise that, all else being equal, investing in stocks of high-quality companies is considered a safer bet compared to lower quality alternatives.

The iShares MSCI USA Quality Factor ETF

The iShares MSCI USA Quality Factor exchange-traded fund has been making waves in the market, boasting a remarkable 25% increase since the beginning of this year. This performance surpasses the S&P 500's gain of 21%. Notably, the ETF owes much of its success to powerhouse companies such as Apple, Microsoft, and Nvidia. These three giants alone account for approximately 13% of the ETF's portfolio. Other prominent holdings include Meta Platforms and Alphabet. However, since November 15, the quality ETF has seen a modest increase of only 0.8%, while the S&P 500 has experienced a gain of 1.5%. This shift can be attributed to the recent market trend favoring cheaper, more economically-sensitive stocks.

Big Tech and The Quality ETF

Given that a considerable portion of the Quality ETF consists of Big Tech companies, it makes perfect sense that this sector has contributed significantly to the ETF's success. These tech giants boast higher profit margins and possess financially resilient balance sheets. Furthermore, they have been harnessing the power of artificial intelligence to enhance their products and generate additional revenue streams. Their ability to meet analysts' forecasts for double-digit profit growth solidifies their status as valuable assets within the ETF. However, it is worth noting that the ETF includes other notable companies beyond the realm of tech. Visa, for instance, holds the largest position in the fund. Additionally, large stakes in Nike, UnitedHealth Group, and Eli Lilly contribute to the fund's diversification.

Exploring High Quality Stocks

Considering the Quality ETF's current plateau, it presents an opportune moment to explore high quality stocks independently. Recognizing this opportunity, 22V Research has diligently screened for underperforming high quality stocks that have demonstrated strong execution of their strategies. Some noteworthy stocks that emerged from the screening process include Adobe, PriceSmart, National Beverage, and ServiceNow.

In conclusion, while the quality ETF may be in a temporary lull, the outlook for high quality stocks remains promising. As we navigate through the market, cautious anticipation surrounds the fading impact of November's extreme rotation away from quality stocks. According to Dennis DeBusschere of 22V Research, model performance is expected to improve in December. Therefore, now is an ideal time to consider incorporating high quality stocks into your portfolio.

Cigna: A Promising Stock Opportunity

Cigna's stock presents an intriguing investment opportunity. Despite a recent slump sparked by rumors of a potential merger with Humana, the stock has fallen 19% from its yearly high. At its current valuation, it appears quite attractive, trading at only 9.3 times earnings per share estimates for the upcoming year, which is roughly half the valuation of the S&P 500.

However, the possible acquisition of Humana raises concerns. If Cigna proceeds with the purchase, the combined company would see a significant increase in the number of outstanding shares, subsequently impacting earnings per share. Currently valued at $76 billion, Cigna possesses $8 billion in cash. A hypothetical acquisition of Humana, estimated to exceed $70 billion by RBC analyst Ben Hendrix, would necessitate issuing tens of billions of dollars' worth of stock.

Notwithstanding the potential dilution in earnings per share, Hendrix posits that future growth will ultimately compensate for this setback. Billions of dollars in cost synergies, primarily stemming from reduced salary expenses, coupled with continuous sales growth, have the potential to bolster earnings over time. Yet, skepticism remains among analysts regarding approval from the Federal Trade Commission for the merger of these two companies.

Regardless of the merger outcome, Cigna anticipates substantial growth on its horizon. Analysts project a revenue increase of approximately 13% annually over the next four years, resulting in a staggering $315 billion by 2027. To support this growth trajectory, Cigna is intensifying its focus on Evernorth, its health services business. This division encompasses pharmacy benefits, product home delivery, and innovative health solutions. By gaining a deeper understanding of each member's unique healthcare needs, Cigna aims to reduce costs for both its members and the company itself. Consequently, analysts foresee mid-single-digit premium growth in the coming years.

In an industry where quality and affordability rarely coincide, Cigna sets itself apart as an exceptional find.