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Cyclical shares staking a quality claim

Dispersion in markets and recent good runs are affecting our quality screens
Cyclical shares staking a quality claim
  • Miners score well on the back of good recent runs
  • US pharma and tech ranks highly

No UK-listed large cap company passes all nine of our quality screen tests, with top ranker BHP Group (BHP), the mining giant, coming up short against our next year earnings per share (eps) growth test. This was also the only test it failed last time we ran the screen and, interestingly, its ranking based on the combination of trailing operating profit margin and share price momentum has improved.  

Mining stocks, given the cyclical nature of the industry can’t really be regarded as steady quality in the investment theory sense of the word. The good run that has been enjoyed by many miners does help them score well against our tests, and there are a few miners on the list in our smaller companies screen, too. 

Some familiar bastions of UK-listed quality that score well include alcoholic drinks and brands business Diageo (DGE) and engineering firm Spirax-Sarco (SPX). 

Many other high rankers could face competitive or market headwinds, however, so caution is advisable, especially given the combination of an economic slowdown and stubbornly high inflation affecting end consumers. This could be the case for online platform businesses such as Rightmove (RMV) and Autotrader (AUTO) if there is a cooling in the housing and used car markets, respectively. 

On the other side of the Atlantic, our US screen is flagging giants in healthcare and pharmaceuticals. Top of the screen are Merck (US:MRK) and Vertex Pharmaceuticals (US:VRTX), with Johnson & Johnson (US:JNJ) also scoring full marks. The prospect of aggressive interest hikes has made investors reappraise what they’re willing to pay for tech stocks, but as the high-ranking of companies like Apple (US:AAPL) and Microsoft (US:MSFT) demonstrates, these businesses retain many hallmarks of quality investments.

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