It's a tricky time for the S&P 500 — as September is usually the worst month of the year. And it looks like some investors are preparing by owning some — but not all — high-quality stocks.
Nine of the stocks in the Invesco S&P 500 Quality ETF, including information technology play Fortinet, industrial Generac Holdings and energy Devon Energy, are soaring as investors look to them as safe harbor, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. All these stocks are up 50% or more this year, even as most quality stocks are languishing as investors figure more speculative plays will pay off.
But investors could scramble for quality again.
S&P 500 Quality Over Quantity
The S&P 500 is starting to remind investors of the perils of this time of year. The market dropped Wednesday for the third day in a row and is now off 0.3% for the month, says Wilshire Associates. That's erased $125 billion in market value.
And quality isn't valued, yet, even with professional investors.
Mutual funds "remain overweight low-quality stocks and are underweight high-quality stocks, where the latter tend to hold up better during weaker markets," said Savita Subramanian, strategist at Bank of America Securities. "We expect quality to outperform."
If there is a rush into quality, investors are already picking their spots in the S&P 500. But, they're not buying quality wholesale.
The Invesco S&P 500 Quality ETF is flat over the past 30 days. That means it's trailing the S&P 500's nearly 1.9% rise in that time. Meanwhile, for the year, the Quality ETF is up 19.9%, narrowly trailing the S&P 500's 20.6% gain.
The Quality ETF owns 100 large companies in the S&P 500 with traits like higher earnings quality and earnings stability, and lower leverage. And roughly half are beating the S&P 500, while half are trailing.
But some quality stocks are absolutely in vogue.
Fortinet: An S&P 500 Quality Benchmark
When it comes to investors' favorite quality stock in the S&P 500, Fortinet is pulling ahead.
The cybersecurity firm is well-known for its top-notch management team. It also checks all the boxes for quality. Profit is up more than 20% in the most recent 12 months. And for many years, it carried no long-term debt. Only recently this year did it borrow a manageable $987.5 million. Such strong fundamentals paired with its rising stock price awards the company with a near-perfect 98 Composite Rating. Shares of Fortinet are up more than 108% this year, making it the top-performing stock in the quality index.
Finding Quality In S&P Industrials And Energy
Top notch quality isn't reserved to just technology. In fact, two of the quality stocks up more than 50% are industrials, tied with technology in terms of representation in the top eight quality stocks.
One is generator maker Generac, also known for its top-notch management team. Powered by demand from electric disruptions around the world, shares are up nearly 95% in a year's time. Following a summer of harsh weather, Generac stock is up nearly 7% just in the past 30 days. S&P gives Generac top marks on operational, solvency and liquidity grades. And its Composite Rating is 97.
And in the energy sector, Devon Energy is rising in the quality pile. Shares of the Oklahoma City-based firm are up 78.6% this year. That's a standout run even in the rising energy sector. The Energy Select Sector SPDR Fund is up just 25.9% this year. Like many energy firms, Devon slipped into the red in 2020. But it's on pace to make nearly $2 billion, or $2.83 a share, this year.
Will quality matter in the S&P 500 again? Subramanian thinks investors will find out soon. "We expect downside to the S&P 500 index through year-end," she said.
Top Quality S&P 500 Stocks
Members of Invesco S&P 500 Quality ETF up the most this year
| Name | Ticker | Stock YTD % Ch. | 1-month % stock ch. | Sector |
|---|---|---|---|---|
| Fortinet | 108.2% | 1.8% | Information Technology | |
| Generac Holdings | 94.9 | 6.8 | Industrials | |
| Devon Energy | 78.6 | 4.5 | Energy | |
| Robert Half International | 64.0 | 2.7 | Industrials | |
| The Interpublic Group | 58.0 | 0.6 | Communication Services | |
| Capital One Financial | 56.4 | -6.8 | Financials | |
| Applied Materials | 54.8 | -6.4 | Information Technology | |
| Eli Lilly | 50.9 | -3.3 | Health Care |
