Momentum and value investing strategies were hugely successful in 2013, with small and mid-cap stocks catching the attention of investors and many of them seeing huge price gains as a result. By comparison, screens with demanding ‘quality’ criteria were often lost in all the excitement but with it could be precisely this approach to stock-picking that offers investors the best chance of achieving consistent gains in the face of potential market volatility in 2014.

One of the interesting observations from our recent review of Stockopedia’s 60 GuruModels was that Quality screens like the Warren Buffett-inspired Buffettology-esque Historical Growth (+26%) and Joel Greenblatt’s Magic Formula (+24%), while delivering reasonable gains, were off the pace of many other strategies in 2013. In the case of the Magic Formula, the screen actually underperformed the FTSE 100 between January and August. But as Greenblatt noted in The Little Book That Beats The Market:

“...if the magic formula worked all the time, everyone would probably use it. If everyone used it, it would probably stop working.”

Like a number of other Quality screens, it wasn’t until the summer - when the US Fed rowed back from signalling an end to monetary easing - that the Magic Formula began to accelerate.

With the issue of QE tapering back in the headlines and growing concern that some parts of the market are due for a pullback (particularly if earnings results are disappointing), investors face some tough decisions. With undervalued, small-cap growth stocks proving so attractive and becoming so much more expensive during 2013, the issue of ‘quality’ could well become much more important next year. As a timely reminder, in a recent update to their paper entitled Buffett’s Alpha, analysts at US hedge fund AQR Capital recently reiterated their view that much of Warren Buffett’s investing success has been down to his focus on buying cheap, safe, quality stocks. So how do you find them?

Hunting for cheap, quality shares

Using Stockopedia’s Quality + Value (QV) Crossover Rank, it’s possible to view shares that rank the highest in the market based on a blended range of quality and value metrics, which you can use as a first step in researching individual companies. Applied to mid-cap stocks, the screen is currently topped by public transport provider Go-Ahead (LON:GOG), which…

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