Genuine large and medium cap stocks that score full marks on our FTSE All Share quality screen include luxury goods firm Burberry (BRBY), tobacco company Imperial Brands (IMB), drinks business Diageo (DGE), specialist publisher and data firm RELX (REL) and engineer Spirax-Sarco (SPX). The issue with buying these businesses, however, is whether they are too expensive.
- Other big firms may only fail one test and further investigation of these metrics is a good step to take in further research. For example, gold and silver miner Polymetal (POLY), equipment rental specialist Ashtead (AHT) and Real estate investment trust SEGRO (SGRO) miss the requirement to have had above median return on equity (ROE) for each of the past three years. In the case of Polymetal, this demonstrates that although gold and silver miners have been a good pick over the last year, the sector is cyclical by nature.
- The results of the smaller cap and Aim screens should also be considered different to quality shares in the traditional sense of steady growth and low volatility. There are plenty of decent companies but some might be better considered as promising businesses that have enjoyed a catalyst for growth in recent years. These smaller companies need to also be assessed for other aspects of quality, such as trends in their working capital positions and cash flow.
