The Market Will Soon Get This Right
Investors are turning their backs on the highest-quality stocks.
If you've been following me for long, you'll know I'm a conservative investor. I prefer consistent dividend-payers with high free-cash-flow ("FCF") margins to high-growth companies with small profits.
But the quality stocks I like have been out of favor lately.
Instead, investors have poured into high-flying tech stocks with maximum AI exposure...
These include Big Tech stocks like Alphabet (GOOGL), Apple (AAPL), and Microsoft (MSFT), which make up a huge weight in the S&P 500 Index.
The S&P 500 has risen 12.5% this year... But as you can see below, only a small portion of stocks are beating the index...
The next chart shows a basket of unprofitable tech stocks, put together by Goldman Sachs. These stocks are crushing the market this year, even after they pulled back in recent weeks.
Meanwhile, the quality, durable businesses that I love have been heavily out of favor...
One example is Colgate-Palmolive (CL). The company – which sells essentials like toothpaste, soap, and pet food – dates back to 1806. It has been a trusted maker of consumer staples for more than 200 years.
Colgate-Palmolive is also a "Dividend King," a rare company that has increased its dividend for more than 50 years. Yet investors aren't interested in it...
While unprofitable tech stocks have nearly doubled since April, Colgate-Palmolive is down 17% in that time frame. And it's down a whopping 27% since September 2024. Take a look...
Another example is alcohol company Constellation Brands (STZ). It has returned shareholders 12% a year since 1986. Its FCF margins are regularly around 20%. And our proprietary Stansberry Score gives it an "A" grade based on a combination of financials, capital efficiency, valuation, and – to a lesser degree – momentum.
But the stock trades for just 11 times earnings today. Its price is getting close to its pandemic low...
And Clorox (CLX), another great dividend-payer, is at a decade low...
We could go on and on.
The point is that investors aren't interested in quality, boring businesses. Folks are ignoring companies that don't make headlines – even if they generate a lot of cash and return that cash to shareholders.
We can see that by comparing the Invesco S&P 500 Quality Fund (SPHQ) with the Invesco S&P 500 High Beta Fund (SPHB). These funds track the performance of the 100 highest-quality and 100 most volatile stocks in the S&P 500, respectively.
In the chart below, a higher ratio means quality stocks are doing better. But today, the ratio is near a low, meaning the more volatile names are outperforming...
And here's another chart showing how out of favor quality stocks are. It compares the six-month returns of the S&P 500 Quality Index with the S&P 500. As you can see, the underperformance of high-quality stocks is the most extreme it has been since the 1990s...
Finally, I'll leave you with one more piece of evidence...
No one cares about "defensive stocks" today.
Take consumer staples, which we discussed above with Colgate-Palmolive and Clorox. Longtime subscribers know we love consumer staples because they make products that folks need no matter what the economy is doing. Revenue growth is never high, but it's steady. And so are dividend payments.
It's the same with health care... Everyone needs medicine in good times and bad.
And utilities are the ultimate defensive play. These are companies that enjoy guaranteed profits from their monopolies on providing local water, gas, and electricity.
The chart below shows the total combined market-cap weight of consumer staples, health care, and utilities in the S&P 500. These three defensive sectors have been losing market share for years and are now at a five-decade low. Take a look...
When you consider everything we looked at today, it's clear that both high-quality and defensive stocks are trading at extreme lows compared with their risky, headline-making counterparts. But they will rebound. The market won't ignore them forever.
So if you're looking to buy some reliable businesses that will let you sleep well at night, now is the time to get in before the pendulum swings back.
Changing gears, two natural resource investing experts with decades of experience went on camera yesterday to share "the biggest investing story of our time."
They say the U.S. government is aggressively backing critical-resource firms as a matter of national security. And any company that ends up on Washington's "short list" can soar 1,000% or more. One mining stock even doubled overnight after the government took a position.
This is an opportunity that politically connected billionaires – like Jeff Bezos and Peter Thiel – are already taking advantage of.
Click here to learn more (and get a free stock recommendation just for tuning in).
What We're Reading...
- Something different: Anthropic to buy $30 billion in Azure capacity in new deal with Microsoft and Nvidia.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
November 19, 2025