10 quality stocks that have held up in a jittery market

With stock markets up and down like a yo-yo, Stockopedia’s Ben Hobson shares his checklist for those times when the market gets volatile.

Last week’s short, sharp market sell-off brought back painful memories of the deeper drawdown that hit shares in early 2020. While confidence has recovered over the past 18 months, it seems the threat of more restrictions really can scare the market.

In terms of sentiment, the second half of last year was very much a “risk on” phase for speculative stocks. As the world wrestled with Covid, small-cap growth companies did especially well in a rising market.

• Omicron: new wave of queasiness hits the markets
• Check out our award-winning stocks and shares ISA

But this year that bullish appetite for racier types of equities has faded. Many that had soared to expensive valuations have lost their momentum. In places, share prices have fallen sharply on any hint of disappointment in earnings news. Confidence has definitely cooled in places. Anecdotal evidence suggests it’s been a tough time for many individual investors.

But that doesn’t mean that all stocks are being punished. Just like the Black Friday sales last week, one-day market sell-offs can be revealing. Amid a flurry of cut-price deals, some high-quality stocks were not marked down at all. Others saw very fleeting sell-offs before their prices jumped back up. For the most part, the positive momentum trends in these kinds of stocks remained intact.

Faced with a sea of red, of course, it’s not exactly easy to dive into a falling market to pick up bargains. But for those with a longer-term view and sturdier constitution, having a set of rules to stick with in volatile periods is worth considering.

A focus on quality and momentum

Two factors that can be a useful guide at any time, but especially in a sell-off, are quality and recent momentum. It’s a strategy that’s really about finding good-quality shares with prices that aren’t as badly affected by general market conditions.

On the quality side of this approach, it’s worth looking for companies where earnings have been growing. After two years of economic uncertainty, earnings are more important than ever, and growth here is an important quality bar.

• The great investment strategies: momentum investing
• Subscribe to the ii YouTube channel and catch all our latest interviews and video content

You might also consider looking for companies that have an above-average Return on Capital Employed (ROCE). This is one of a few essential quality metrics that can tell you a lot about how efficient a company is at making profits. The higher the ROCE, the better the company is at reinvesting its own earnings to keep those profits growing.

On the momentum side of the strategy, near-term price strength against the market - over the past three months - can be a promising signal. Stock prices performing better than the underlying market can be a pointer to companies that remain in demand regardless of the conditions.

Using these rules, here’s a list of some of those stocks with potentially strong quality characteristics and solid recent momentum:

The QualityRank in this screen scores and ranks every company in the market based on factors including profitability, financial strength and safety - from zero (poor) to 100 (good). In terms of size, the results range from Tandem (LSE:TND), a small-cap cycling equipment distributor, all the way through to large-caps such as the construction supplies giant Ferguson (LSE:FERG), mining group Fresnillo (LSE:FRES) and online vehicle retail platform Auto Trader (LSE:AUTO).

Making sense of manic markets

One of the takeaways from this “quality and momentum” approach is that some of the strongest top resulting stocks are large-caps. After a long period that really benefited smaller, speculative shares, there are signals that the market is favouring larger, perhaps more conservative companies - and certainly those with strong quality traits.

• Friends & Family: ii customers can give up to 5 people a free subscription to ii, for just £5 a month extra. Learn more

After a week when investors were reminded of the uncertainty that still hangs over the economy, it’s worth remembering that some stocks are holding up well. A checklist like this can be worth keeping to hand for those times when the market gets volatile.

Stockopedia helps individual investors beat the stock market by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions. Stockopedia is rated Excellent on Trustpilot and was named Best Research Service and Best Investment Tools Provider at the 2021 UK Investment Magazine awards.

Interactive Investor readers can get a free 14-day trial of Stockopedia here.