Quality shares FOMO should be avoided

Stock markets have recovered markedly over the past month on both sides of the Atlantic and some of the shares highlighted by our quality screens are showing impressive momentum over a three month period, too. But investors need to be wary of their fear of missing out (FOMO) which could drive bad decisions. In the US in particular, a better inflation print has given rise to some optimism the Federal Reserve might not be as hawkish as feared by the end of the year, although such an interpretation may be jumping the gun. In any case, if the next quarterly numbers demonstrate the recession feeding through to company earnings, then that could well cause shares to sell off strongly again.

It’s not all bad news though. Our quality shares screens are flagging the types of companies to keep an eye on. Our UK large cap screen is topped by data business Experian (EXPN), which doesn’t fail a single test. Credit testing may be the sort of specialist area that holds up in a recession. However, expected earnings growth is solid rather than spectacular, so it may be worth waiting for a market pull-back. 

The other top ranking UK large caps are sin stocks, with tobacco company Imperial Brands (IMB) and drinks giant Diageo (DGE) also getting 9/9 scores. Diageo has always been a great business to own a slice of but, again, cheaper opportunities to do so could soon emerge.

Our Aim screen this month is topped by Water Intelligence (WATR), a leak detection specialist that’s offerings are especially prescient given the drought conditions this summer. The shares are still not as expensive as a year ago, but jumping behind investment themes is not without its perils given the wider stock market is far from out of the woods and now is not the time to be paying high premiums for growth stocks.