The high-quality stocks

Mr Secker uses his 'FTSE 100 earnings per share reliable growth filter' to weed out such shares. He says the shares below "have a good track record of producing earnings growth with low volatility, yet trade at a significant discount to the wider market – the median stock in this basket trades on 12-month forward PE ratio of 12.2 versus 12.8 for the median stock in the FTSE 100."

Mr Secker uses three main measures to focus his research:

■ The median quarterly percentage change in the consensus estimates of analysts following a stock as they estimate future earnings. This is for a 13-year period since 1995 and shows the companies that have consistently grown earnings.

■ The standard deviation of these quarterly changes in 12-month forward earnings per share (EPS) over the past five years. This helps weed out companies with volatile earnings in favour of those showing steady growth.

■ The probability that a quarterly change is positive is then calculated based on data since 1995.

Table one: Graham Secker's approach

Andrew Lapthorne and balance sheet strength

Andrew Lapthorne at SocGen takes a slightly different tack, although many of his conclusions end up mirroring those of Mr Secker. Mr Lapthorne believes the next leg of the recovery might be a move into more defensive stocks where earnings growth will be rather sedate, but potentially much more resilient. But debt levels remain a major worry for many investors, so the focus is on companies with defensive characteristics where debt levels are low, balance sheets are strong and the share price is at reasonable levels relative to underlying earnings growth.

His team focuses primarily upon the dividend yield, which should ideally be above the market average), and how well it is covered by the company's cash earnings. To do this, they use a widely accepted analytical measure called the 'F Score', developed by University of Chicago accounting professor Joseph Piotroski. The higher the F-score, the greater the potential for returns, with anything above six regarded as superior.

SocGen also uses a financial model first devised for bond investors called the Merton Model. This looks at a company's debt position and its ability to service those debts.

Crunching the numbers results in the winners shown in table two.

Table two: Andrew Lapthorne's approach

Finding your own quality shares

What can we take from these two analysts? How should the private investor go about looking for quality shares? Some of the key measures will certainly include the following:

■ Evidence of past earnings per share growth over in a fairly consistent fashion, but not necessarily in a straight line. Analysts are rightly cautious about companies where earnings per quarter or half yearly manage to magically increase by a steady few percentage points regardless of the economic cycle.

■ Evidence of earnings growth over the near future. There's strong academic evidence which suggests that companies where earnings forecasts are being consistently upgraded by analysts – think Reckitt Benckiser – tend to show the strongest share price growth.

■ Balance sheet strength and debt levels. Analysts with a value bias tend to focus on the quality of the balance sheet, looking for evidence that debt levels are manageable, that current liabilities aren't growing too fast, and that too much money isn't being sunk into capital expenditure that isn't boosting profits.

■ Dividends. These are a huge component of long-term shareholder returns. So any quality share that sports an above-average dividend yield stands a good chance of delivering strong long-term growth – but check that the balance sheet is strong enough to sustain future payouts.

■ The price-earnings (PE) ratio. Quality is all very well, but you don’t want to overpay for it.

Table three: My quality company filter

Theory into practice

The obvious place to start is a stock screening tool, such as the one on our website. This tool is fairly typical of what's available for free; for more sophisticated screening, you'll probably need an paid-for offline service such as Sharescope. Here are some of the variables you might like to use.

■ Market value: big companies are generally more sta ble and, because more analysts follow them, consensus earnings estimates are likely to be more reliable.

■ PE ratio and return on equity. Based on current or future earnings, the PE ratio shouldn't be over 25. But you want companies where capital is used efficiently, so keep an eye on the return on equity measure, which measures the operating profitability versus the equity invested (or the total capital, for return on capital). Reckon on at least 10 per cent.

■ Cash flow. Profits are no good if they're not converted to cash, as investors in Aero Inventory can attest.

■ Debt. This is not a bad thing per se, but it needs to be manageable and the company must be using it efficiently.

■ Peer-group comparisons. Measures such as profit margin and return on capital are valuable when comparing companies to peers. Ideally, you want to be investing in something that's in the top quartile.

■ Earnings growth. The longer the period, the better. Look for consistency rather than huge leaps in individual years. How I got on with these is shown in table three.

A surprisingly large number of companies made it through the initial hoops, so I increased the market value barrier to £250m, and ended up with a more manageable 15 stocks. The top 10, plus the five also-rans, are shown in table four.

Summary table - my quality shares

Comparing the lists

Each of these quantitative analyses has its own particularities and should only be used as the basis for some further analysis and research. The SocGen analysis is the more conservative, less trusting of analysts' estimates and so tends to throw up more defensive companies. Looking at the Morgan Stanley portfolio and my own, there seems to be quite an overlap. With this in mind, perhaps a core FTSE 100 quality portfolio would comprise Serco, Reckitt Benckiser, Intertek, Sage, Imperial Tobacco, BP, GlaxoSmithKline and AstraZeneca. The FTSE 250 equivalent might contain Halfords, WH Smith, Rotork and Chemring.