Impact Blog
What's next for high quality stocks?

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Calvert fund. References to individual companies for Engagement or Research purposes are provided for illustrative purposes only and may not be representative of the results of all of Calvert’s engagement efforts. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Charles B. Reed, CFAVice President and Managing Director
      Atlanta Capital Management

      Atlanta - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by volatile investor sentiment, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. The following are excerpts from a recent conversation with Charles B. Reed, CFA, Managing Director of Atlanta Capital Management.

      What we are seeing: We are seeing the equity markets continue to recover, with large capitalization stocks outperforming small caps and growth outpacing value. Now in the middle of earnings season, the top five stocks in the S&P 500® constitute nearly 20% of the index as of May 1, 2020. The last time we saw this level of concentration was in 1999 during the dot.com bubble. In our view, this could be the tail end of the bounce off the bottom for stock prices. Earnings reports have been sobering, as largely expected, and management teams are reluctant to give much forward guidance. We believe it could be a long slog over the summer and that economic recovery will be slower than expected.

      The first quarter of 2020 was obviously very volatile, with negative returns across global equity markets. Over the past several weeks, I've highlighted how stocks had been sold indiscriminately, evidenced by correlations spiking. We have only recently started seeing signs of differentiation, and we believe this trend will continue, serving as a tailwind to high-quality stock performance. We define high-quality companies as those with consistent growth and stability in their earnings. Higher-quality companies also typically have strong balance sheets, significant free cash flow generation, growing revenues and meaningful competitive advantages. The opposite is true for their lower-quality counterparts. Our historical analysis suggests that high-quality equities have tended to outperform over full market cycles.

      What we are doing: We continue to actively favor companies that we believe will be successful on the other side of the COVID-19 crisis. We are, as I mentioned, in the middle of the first-quarter reporting season. As companies give updates on their current business environments and outlooks, we continue to actively look for opportunities in high-quality businesses at attractive valuations, although we are seeing fewer ideas than we did a month ago. Most recently, we have begun favoring underappreciated stocks with structurally sound businesses over positions with strong relative performance.

      What we are watching: As companies report first-quarter results, we are continuing to analyze a number of short-term and long-term factors regarding a company's growth prospects, structural soundness and ability to withstand recessions. This will allow us to evaluate our current holdings and potentially add attractively priced, high-quality companies as opportunities arise. Our analysis is nuanced, but we are favoring well-capitalized businesses with intact value propositions.

      Final word: As businesses continue to report their first-quarter results and outlooks, we expect to see volatility in company share prices and will continue to add high-quality companies to our portfolios as opportunities arise. Over time, we expect quality to differentiate itself and we believe that many of these companies will actually gain market share and become stronger. We believe sticking to our quality discipline will provide the long-term benefits of equity investing if the markets move higher and may protect if markets face continued volatility or declines.