Dusseldorf The war in Ukraine, rising inflation, rising commodity prices and delivery bottlenecks: the stock markets are threatened with trouble from several directions. Institutional investors are responding by investing in quality stocks. Private investors can also follow this strategy and recompose their portfolio accordingly.
The first step is to clarify the term “quality shares”. What do the pros mean by that? The Swiss private bank Maerki Baumann defines them as titles from companies that can pass on the higher costs of primary products, for example raw materials, through their pricing power. In addition, they have proven their profitability over various economic cycles and have relatively low levels of debt.
A simple way to invest in quality stocks is via ETFs – for example the MSCI World Quality. This invests in quality stocks in 23 industrialized countries. The shares are selected according to three equally weighted indicators: “high return on equity”, “low level of debt” and “stable earnings growth”. The largest positions here are tech giants Facebook, Apple, Microsoft, Nvidia, and two classes of Alphabet. Possible providers are iShares (ISIN: IE00BP3QZ601) and XTrackers (ISIN: IE00BL25JL35).
However, due to its heavy weighting on the tech giants, the MSCI World Quality is very similar to the MSCI World stock index. In a current study, DZ Bank has therefore filtered out alternatives from the individual values.
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In the following, the Handelsblatt presents six quality stocks. The list does not constitute a purchase recommendation, but can be used as a starting point for further research.
Adobe Systems
The US software company focuses on private customers and companies with its products such as Acrobat and Photoshop. However, concerns about rising interest rates have recently caused prices to fall. For this reason, JP Morgan already lowered its recommendation from “overweight” to “neutral” in December.
The stock is also highly valued based on fiscal 2021 earnings with a price-to-earnings (P/E) ratio of 45. This Tuesday, Adobe then also disappointed with its latest quarterly figures and the outlook.
However, DZ Bank analyst Axel Herlinghaus had expected this development: “In our opinion, Adobe’s comeback hour will come in the second half of the calendar year.” Then there would be more geopolitical and economic clarity, the comparative values from the previous year would be easier to beat and the conservative estimates for the financial year could be exceeded. That would steer the market’s perspective and valuation focus back to the excellent fundamentals: sales have risen by an average of 22 percent since the 2014/15 financial year, and the adjusted pre-tax profit by 42 percent.
Herlinghaus currently sees the fair value for Adobe at $620 – around 30 percent above the current rate. This makes it a bit more pessimistic than the average of the analysts observed by data provider Refinitiv, whose average price target is $625.
Analyst Rating: 25 Buy, 6 Hold, 0 Sell
Applied Materials
The US group is a big beneficiary of the semiconductor boom: the company from Silicon Valley is the world’s largest manufacturer of semiconductor machines. Thanks to its technologically leading products, it has a high level of pricing power.
Applied Materials should be “disproportionately favored by the cross-industry chip demand over the next few years,” says DZ Bank analyst Ingo Wehrmann. However, the group itself is suffering from the current lack of chips and cannot meet the demand. The share therefore fell by almost 30 percent from mid-January to mid-March. But recently things have picked up again.
Because Applied Materials still achieved record sales in the first quarter of the current fiscal year (ending on October 31, 2022). “The management is talking about being almost sold out this year,” reports Wehrmann. A dividend increase and a new share buyback program were also resolved. Most recently, Needham analysts raised their price target to $172 – just below the average price target of $175.
Analyst Rating: 26 buy, 10 hold, 0 sell
ASML
The chip supplier is Europe’s most valuable tech group ahead of SAP – although the share has lost more than 30 percent of its value from its high in November to early March. Recently, however, it seemed as if the bottom of the correction had been reached. With a 2021 P/E of 41, the stock is still relatively expensive.
The Dutch are benefiting from the boom in the semiconductor industry. The unique selling point of ASML is EUV lithography. This technology makes it possible to produce next-generation chips with structure sizes of less than seven nanometers. According to DZ Bank expert Wehrmann, the group has “a monopoly position and therefore great pricing power”.
Wehrmann sees the “fair price” for the ASML share at 778 euros. Compared to the current price, that would be an increase of more than 20 percent. The average price target of all analysts tracked by the data provider Refinitiv is even slightly higher at 800 euros. Alexander Duval from Goldman Sachs recently even confirmed his price target of 930 euros.
Analyst Rating: 27 Buy, 5 Hold, 1 Sell
Kering
The French conglomerate is now consistently concentrating on the fashion industry. Here he owns luxury brands such as Gucci, Yves Saint Laurent and Balenciaga. “We think the new strategic orientation with a focus on the fashion industry is right, because it makes the company a ‘pure player’ in this sector,” says DZ Bank analyst Michael Pohn.
The focus on the luxury industry allows Kering high margins. The group is particularly successful in China. The company generated almost 40 percent of its sales last year in the Asia-Pacific region (excluding Japan). Overall, sales last year grew by more than 30 percent compared to 2020 and by eleven percent compared to the pre-Corona year 2019.
However, analyst Carole Madjo from Barclays also sees one of three risk factors for Kering in the strong focus on China. Others include inflation and activity in Russia. Despite this, fundamental sector prospects remain solid. For many industry stocks, the current price weakness presents a good buying opportunity, and Kering is one of their favourites. Your price target is 795 euros, more than 30 percent above the current price. This puts her right in line with the average of her peers.
Analyst Rating: 22 buy, 7 hold, 1 sell
LVMH
LVMH is by far the industry leader in the luxury goods segment. The French own brands such as Louis Vuitton, Moët & Chandon, Hennessy and Dior. Last year, sales exceeded the pre-Corona year 2019 by 20 percent.
Pohn from DZ Bank expects this high earnings dynamic to continue this year. “Mainly worn by the fashion and leather goods division. It achieves operating margins of almost 40 percent and is gaining market share.”
Although the stock is already expensive with a 2021 P/E ratio of 24, Jefferies analyst Flavio Cereda sees further upside potential. He continues to think LVMH is a “real post-pandemic winner”.
Cereda lowered its price target by 100 euros to 750 euros because of the Ukraine war and its effects on European luxury goods manufacturers. However, this still corresponds to a price potential of more than ten percent. On average, the analysts are even more optimistic with a price target of 800 euros.
Analyst Rating: 28 Buy, 6 Hold, 0 Sell
Sanofi
The French pharmaceutical company is a dividend guarantor: since 2002, Sanofi has increased its profit distribution per share every year. Most recently it was EUR 3.20 and is expected to rise to EUR 3.33.
Sanofi recently applied with Glaxo-Smithkline for approval of their jointly developed, “classic” protein-based corona vaccine. The company’s focus is on immunological and so-called rare diseases. These are areas “in which margins and growth rates are higher and, above all, more reliable,” explains DZ Bank analyst Elmar Kraus.
The biggest profit driver is currently the asthma drug Dupixent, whose sales rose by 53 percent to $5.2 billion last year. Experts consider an annual turnover of ten billion euros to be conceivable.
However, the novel breast cancer drug amcenestrant, which did not achieve the primary study goal in the clinical phase 2 study, recently flopped. Analyst Emmanuel Papadakis from Deutsche Bank then lowered his price target to 80 euros, i.e. below the current price.
On average, however, the stock experts are significantly more optimistic with a price target of EUR 107.50. Peter Welford believes that the increased demand for value stocks favors the stock in the current market environment. He confirmed his price target of 120 euros.
Analyst Rating: 23 buy, 5 hold, 1 sell
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