Tumultuous Times Highlight Efficacy of Quality

In the essence of not sugar coating things, the S&P 500 is lower by 13.39% year-to-date, as of May 6. An awe-inspiring that is not and some sectors are performing more poorly than that.

One of the epicenters of equity market erosion this year is growth stocks and that sentiment extends well beyond smaller, speculative fare. Apple, Microsoft, Alphabet, Amazon, Meta Platforms and Netflix – stocks previously viewed as dependable and surprisingly reliable are anything but these days.

Of that group, the “best performers” in terms of shed market capitalization from previous highs are Apple and Microsoft, which as of April 29, lost 14.6% and 19.4%, respectively, of their market values from prior highs. Netflix is the most egregious offender, having shed about three-quarters of its market cap from its Nov. 17, 2021 high.

As a result, that now dubious group of six accounts for about 21% of the S&P 500 compared to nearly 25% at the end of August 2020.

Patience Require Because Math Doesn’t Favor Investors

It’s understandable that many clients today may be interested in the likes of Amazon, Meta Platforms and Netflix, among other downtrodden growth names. Some of those clients probably missed previous rallies in those stocks and are now pondering value cases in those names.

Value propositions may yet present themselves in these stocks and others, but some are being painted with the dreaded “pandemic play” brush and that’s  near-term drag.

“Meta and Netflix—both major stay-at-home beneficiaries—now have market capitalizations that are well below pre-COVID-19 levels. Amazon, after plunging 14% on Friday, is nearly lagging the S&P 500 since 2019—an almost unimaginable scenario back in 2020,” says WisdomTree analyst Matt Wagner.

Further muddying the waters for Meta and Netflix are those companies’ decisions to engage in politics that aren’t appealing to the entirety of their subscriber/user bases. Even if that point is disregarded, though price action confirms it shouldn’t be, the math on Meta and Netflix returns to previous highs isn’t attractive.

“After drawdowns of more than 50% for both Meta and Netflix, those companies would have to have returns of 99% and 262%, respectively, simply to recover back to their peak market caps,” adds Wagner.

Quality Still Matters

I frequently extol the virtues of quality investing in this space and while quality stocks aren’t impervious to this year’s broader market weakness, the right quality strategies can limit clients’ downside exposure.

“While a quality company can be defined in many ways, WisdomTree has included a cash dividend screen on its quality Index as a consistent dividend payment is a signal of corporate health and cash management discipline,” adds Wagner. “From this perspective, this Index screens non-dividend payers like Amazon, Meta, Alphabet and Netflix as ‘anti-quality.’”

The WisdomTree U.S. Quality Dividend Growth Index – as its name implies – is a dividend-based benchmark. As such, it features no exposure to Alphabet, Amazon, Meta and Netflix aren’t dividend payers. The difference is material as that index is beating the S&P 500 by 610 basis points year-to-date.

“Going forward, with equities challenged by the combined forces of rising rates, elevated valuations, and profit margins being squeezed by inflation, a basket of dividend payers that is over-weight in high-quality companies may be best positioned to maintain margins, control for valuations, and provide a cushion to returns with stable and growing dividend payouts,” concludes Wagner.

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