How to improve quality investing

Abstract

In this article, we evaluate the relationship between quality investing combined with Economic Moat, ESG (Environmental, Social and Governance) and analyst opinions over the period 2014–2020 based on a data set comprising 803 US stocks. Performance is evaluated using several metrics (returns and alphas). Our results show that quality stocks measured by return on invested capital (ROIC) exhibit superior performance. The incorporation of competitive advantages allows a better discrimination among the classic high-quality strategies. Investment in stocks with quality and high ESG entails the payment of a premium but buying quality companies with Economic Moat makes up for this negative aspect. The results show how quality companies that have competitive advantages obtain a better future performance and are recognized by the market with a higher valuation. However, the markets may take time to recognize this value since the incorporation of the average Price-to-Price target (Analyst consensus) increases the future performance.