In this article, we will take a look at the 11 best quality stocks to buy now.
During these uncertain times, when the Federal Reserve is on a mission to fight inflation by increasing benchmark interest rates, including the best quality stocks in your portfolio can help protect your savings. The Federal Reserve has increased the benchmark interest rates by 75 basis points (bps) the past four times to a range of 3.75% to 4%. Experts anticipate a further 50 bps hike when the Federal Reserve meets in December. Federal Reserve officials anticipate that the benchmark interest rate will peak around the 4.6% level over the next year. Meanwhile, some hawkish members of the Federal Reserve anticipate the interest rate to peak at around the 7% mark. Experts also believe that earnings could fall by 8% next year due to macroeconomic uncertainty.
Amidst the bearish market momentum, it can be difficult to make investments in stocks with strong upside potential. Many analysts think that the quality of a stock can be gauged by its intrinsic value, returns, and earnings quality. However, there is no consensus on one particular basis to gauge quality. Some experts believe that price multiples like price-to-book (P/B) value, price-to-cash flow (P/CF), price-to-earnings before interest, taxes, depreciation, and amortization (P/EBITDA), and price-to-earnings (P/E) ratios are sound measures to determine the quality of a stock. Furthermore, low volatility in the bottom line, high asset turnover and margins, low level of debt, and low-risk profile can also be considered indicators of high-quality stocks. In line with these metrics, companies like Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), and NVIDIA Corporation (NASDAQ:NVDA) are considered some of the best quality stocks in the market currently.
Photo by Ruben Sukatendel on Unsplash
Our Methodology
We have shortlisted the 11 best quality stocks based on their business fundamentals and earnings quality. These companies have shown strong growth in earnings on a YoY basis and are expected to help investors yield decent returns in the long term. Furthermore, these companies are blue-chip stocks with sound business models and industry-leading positions. Most of these stocks also offer attractive annual dividend yields as of December 5. The stocks have been ranked using Insider Monkey’s database of 920 hedge funds as of Q3 2022.
Best Quality Stocks to Buy Now
11. Lockheed Martin Corporation (NYSE:LMT)
Number of Hedge Fund Holders: 53
Lockheed Martin Corporation (NYSE:LMT) is a Maryland-based aerospace, arms, defense, information security, and technology corporation with a global presence.
The maker of the F-35 fighter has emerged as the biggest contract recipient with the US Department of Defense. Lockheed Martin Corporation received $39.2 billion worth of contracts from the Pentagon over the last year. Following the better-than-expected Q3 2022 results and an expanded share buyback plan, Peter J. Arment at Baird upgraded Lockheed Martin Corporation stock from a Neutral to an Outperform rating while maintaining a target price of $513 on October 19.
The analyst believes that the company’s ability to generate strong cash flows is still in place, and the strong buyback plan in a volatile market limits the downside potential of Lockheed Martin Corporation. Furthermore, Lockheed Martin Corporation is expected to be a beneficiary of a ramped-up global defense expenditure at a time when tensions between global powers are high. The stock offers an annual forward dividend yield of 2.48% as of December 5.
Vltava Fund discussed its outlook on Lockheed Martin Corporation in its Q3 2022 investor letter. Here’s what the firm said:
“LMT is one of the world’s largest aerospace and defence companies. The war in Ukraine has reminded investors and the wider public just how important these companies are. The aerospace and defence industry in the USA is an established oligopoly. This means that a few large firms play a dominant role. While collectively they comprise an oligopoly, individually they often have monopoly positions in particular narrower segments. Their main counterparty is the US government, a key customer in what is known as a monopsonist position. This is a rather unusual situation, but one that is very advantageous for companies such as LMT.
LMT has a strong and long-term sustainable competitive advantage ensuing from the fact that its products are developed and manufactured at an extremely high level of technology and complexity, its development and contract cycles are measured in decades, and the costs for the government to switch to alternative suppliers are high. Moreover, part of the production is classified as secret, which further takes the wind out of the sails of potential competitors. This results in a very high return on capital and admittedly a slowly but steadily growing business.
In most NATO countries, which are LMT’s customers, defence outlays are based upon the size of GDP. This is currently growing very fast in nominal terms due to inflation in most countries. A number of countries have also announced significant increases in defence budgets, whether it be Germany, which aims to get to the NATO-agreed 2% of GDP, or Poland, which wants to spend more than twice as much on defence…” (Click here to see the full text)
10. The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Holders: 59
The Coca-Cola Company (NYSE:KO) is a Georgia-based beverage company with a global footprint. The company claims that over 1.9 billion servings of its beverages are consumed across more than 200 countries every day.
In a research note issued on October 26, Peter Grom at UBS maintained a Buy rating on The Coca-Cola Company stock and increased the price target from $63 to $68. The analyst termed the Q3 2022 results as strong and the increase in financial guidance as impressive. This was due to organic growth that was able to offset the adverse impact of currency fluctuation. The analyst believes that The Coca-Cola Company can trade at a premium against its peers due to the possibility of strong revenue growth in the upcoming quarters. This makes the risk and reward profile of the stock favorable for potential investors. Experts believe that The Coca-Cola Company has a price leadership position in the market and an advanced top-line growth management strategy that is expected to provide impetus to the top line. The Coca-Cola Company’s (NYSE:KO) annual dividend yield stands at 2.74% as of December 5.
Aristotle Capital Management, LLC, shared its stance on The Coca-Cola Company in its Q2 2022 investor letter. Here’s what the firm said:
“The Coca-Cola Company (NYSE:KO), the global beverage business, was a leading contributor for the period. Coca-Cola continues to benefit from the refranchising of its bottling operations and realignment of incentives, catalysts we previously identified. These initiatives are demonstrating their strength in an inflationary and supply-chain-challenged environment. Additionally, the company has focused on evolving its customer engagement practices by leveraging digital and social medias for targeted campaigns, such as the design and launch of Coke Byte in the metaverse. Lastly, Coca-Cola has furthered its transformation into a total beverage company, as it debuted its new Jack Daniel’s Tennessee Whiskey and Coca-Cola ready-to-drink premixed cocktail. Although uncertainties surrounding cost pressures, lockdowns and geopolitical conflicts remain, we believe Coca-Cola is uniquely positioned to successfully continue its transition toward a total beverage business.”
9. Costco Wholesale Corporation (NASDAQ:COST)
Number of Hedge Fund Holders: 69
Costco Wholesale Corporation (NASDAQ:COST) is the third biggest retailer in the world. The Issaquah, Washington-based company operates as a membership-only big box retailer with large warehouses.
Analysts at Bank of America added Costco Wholesale Corporation stock to the ‘US 1 List’ on November 22. The ‘US 1 List’ comprises the best investment ideas across all the sectors that are covered by the analysts at Bank of America. Experts believe that retailers like Costco Wholesale Corporation will perform strongly through their low-priced private label brands as the consumer is trading down and buying fewer items. The holiday season is expected to provide a boost to the company due to higher consumer spending. Given the raging inflation, people will be looking for value, and Costco Wholesale Corporation falls under that category. Furthermore, the company’s membership program is also going strong as the annual renewal rate sits around the 90% mark. The stock’s annual payout stands at $3.60, translating into a dividend yield of 0.68% as of December 5.
Cooper Investors shared its outlook on Costco Wholesale Corporation in its Q3 2022 investor letter. Here’s what the firm said:
“The US economy continues to run hot – the labour market is extremely tight and a number of executives we spoke to described their challenges in retaining staff and preventing competitors from poaching talent. Industrial companies in particular continue to see record backlogs, with the easing of logistics and supply chain constraints only just starting to have an impact on deliveries and lead times.
In terms of inflationary pressures, the vast majority of our holdings have been able to leverage strong market positions and stakeholder relationships to push pricing through in 2022 such that minimal impact to earnings has occurred. Clearly this is not a lever than can be pulled indefinitely but the more experienced management teams have kept some of their powder dry. Our meeting with management at Costco in Seattle was memorable for several reasons but one was their latent ability to increase member pricing which they have not done in over 5 years (and thus likely to do in 2023)…
…To conclude we’ll return to our meeting with Costco mentioned earlier. The business quality is no secret after decades of incredible execution, but the meeting gave us renewed conviction around Value Latencies in terms of the runway for growth, the focus on enhancing customer value, Costco’s vast buying power (it purchases 30% of the world’s jumbo cashews as one example) and management’s feral focus on the business model and cost discipline.”
8. NIKE, Inc. (NYSE:NKE)
Number of Hedge Fund Holders: 70
NIKE, Inc. (NYSE:NKE) is a Beaverton, Oregon-based company known for its footwear, apparel, accessories, and equipment with a sports-based theme. The company is at the eighth position on our list of the 11 best quality stocks to buy now.
On November 15, NIKE, Inc. increased its quarterly dividend by 11% to 34 cents per share. The company is on track to become a member of the Dividend Aristocrat list as it has been raising its annual dividend for the past 15 consecutive years. On October 13, Rick Patel at Raymond James initiated coverage on NIKE, Inc. with an Outperform rating and a target price of $99. Although the stock is in the red YTD due to macroeconomic headwinds and industry-specific challenges, the analyst has a long-term bullish take on NIKE, Inc.. Experts believe that the company will continue to grow due to its globally renowned brand, out-of-the-box products, and high growth in emerging markets.
Leaven Partners discussed its outlook on NIKE, Inc. in its Q3 2022 investor letter. Here’s what the firm said:
“In our last quarterly letter, I briefly mentioned that the consensus estimates for corporate profits appeared to be a bit too sanguine. I referenced a Reuters article that reported, as of June 17, Wall Street expected S&P 500 earnings to grow by 9.6% in 2022, which was up from 8.8% in April and from 8.4% in January. That tune began to change at the end of July and accelerated in August and September, as major players, such as NIKE (NYSE:NKE), has recently issued profit warnings and/or have withdrawn guidance. In response, Wall Street has altered its outlook: lowering third-quarter profit growth to 4.6%[2] from 7.2% in early August and slashing full-year profit growth to 4.5%.”
NIKE, Inc. was held by 70 hedge funds at the end of Q3 2022.
7. Eli Lilly and Company (NYSE:LLY)
Number of Hedge Fund Holders: 75
Eli Lilly and Company (NYSE:LLY) is an Indianapolis, Indiana-based pharmaceutical company founded in 1876. The products of the company are sold in over 120 countries and manufactured in seven countries.
Kerry Holford at Berenberg increased the price target on Eli Lilly and Company from $345 to $375 and maintained a Buy rating on the stock in a research note issued to investors on November 22. The analyst observed that the underlying performance of the large-cap pharma entity is stellar. Furthermore, the early reports regarding the launch of Mounjaro are positive. The injectable for adults suffering from type 2 diabetes has also received a label expansion as a medication against obesity and is expected to roll out by the end of 2023. Experts believe that Eli Lilly and Company is heading towards a favorable setup with the possibility of donanemab providing more upside in treating Alzheimer’s. As of December 5, Eli Lilly and Company has an annual forward dividend yield of 1.05%.
Eli Lilly and Company was discussed in the Q3 2022 investor letter of ClearBridge Investments. Here’s what the firm said:
“In the U.S., we initiated a position in pharmaceutical maker Eli Lilly (NYSE:LLY) as it brings out new drug candidates for diabetes and Alzheimer’s disease. New drugs impact diabetes but have also demonstrated significant weight loss for patients who are overweight and have other co-morbidity issues as a result. Lilly is one of the two key players in diabetes care and we believe the potential market opportunity is much higher than the consensus forecasts as we are seeing evidence of accelerating adoption.”
6. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 85
Johnson & Johnson is a New Brunswick, New Jersey-based pharmaceutical, medical devices, and consumer goods company. The company is focused on spinning off its consumer goods business as a separate publicly listed entity to focus more on the core pharmaceutical and medical devices segment.
To provide impetus to the core business, Johnson & Johnson has announced the acquisition of Abiomed, Inc. (NASDAQ:ABMD) for $16.6 billion. The takeover of the Danvers, Massachusetts-based heart, lung, and kidney support device maker reflects the next growth frontier for the company following the success of the COVID-19 vaccine. Experts believe that the spin-off of the consumer division will provide value to the investors. Moreover, Johnson & Johnson is targeting to achieve annual revenue of $60 billion through the pharmaceutical and medical devices business by 2025. Experts believe that large-cap pharma stocks provide defensive cover during uncertain times, making Johnson & Johnson one of the best quality stocks to buy now. Johnson & Johnson is a Dividend King and offers a forward dividend yield of 2.58% as of December 5.
Here’s what Mayar Capital said about Johnson & Johnson in its Q2 2022 investor letter:
“J&J is currently our largest position and a long-standing holding. The majority of the group’s sales comes from its collection of pharmaceutical franchises, but a large majority (~45%) comes from its collection of medical device businesses and its consumer brands.
Here’s how JNJ make and spend a dollar of revenues: As of 2021, about 55 cents of that dollar comes from its pharmaceutical sales – sales of drugs to pharmacies and distributors – while 30 cents come from the sale of medical devices, such as surgery equipment and orthopaedics. The rest of that dollar in sales comes from sales of JNJ’s consumer brands such as Listerine mouthwash, Nicorette nicotine tablets and Neutrogena cosmetics.
To make that dollar, however, JNJ typically spends about 25 cents to make the products themselves and another 27 cents on marketing and general administrative functions. This leaves JNJ with about 48 cents on the dollar in profit…” (Click here to see the full text)
In addition to Johnson & Johnson, companies like Microsoft Corporation, Apple Inc., and NVIDIA Corporation are also among the best quality stocks to buy now.
5. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders: 89
NVIDIA Corporation is a Santa Clara, California-based company that is considered a pioneer in the field of graphic processing units (GPUs).
On November 17, Rajvindra Gill at Needham increased the target price for NVIDIA Corporation from $155 to $200 and reiterated a Buy rating on the stock. The analyst highlighted that the company’s Q3 2022 results were strong, with the revenue guidance for the data center industry looking slightly higher than anticipated. Despite the macroeconomic challenges, NVIDIA Corporation is performing well, which makes it one of the best quality stocks to buy now. NVIDIA Corporation will also be a beneficiary of the new product cycle in the gaming and data center industry, with an expectation of quarter-over-quarter (QoQ) growth in 2023.
Here’s what ClearBridge Investments said about NVIDIA Corporation in its Q2 2022 investor letter:
“Chipmaker Nvidia (NASDAQ:NVDA) has also been pressured by multiple compression of higher growth companies and weakness in its gaming business. While Nvidia has grown into a top 10 position with its strong performance through late 2021, we have been consistently trimming the position to derisk against short-term volatility in its gaming business. The company is clearly exposed to the semiconductor cycle but also participates in the secular growth of cloud and AI adoption through its data center business. With these secular drivers intact and new products ramping up in the second half of the year, we are maintaining an overweight to the company.”
4. S&P Global Inc. (NYSE:SPGI)
Number of Hedge Fund Holders: 90
S&P Global Inc. is a New York-based credit rating agency that is known for publishing research and analysis on bonds, commodities, and stocks.
On November 7, Simon Clinch at Atlantic Equities upgraded S&P Global Inc. stock from a Neutral to an Overweight rating. The analyst also increased the target price from $356 to $386 after the company reported strong Q3 2022 results. Clinch pinpointed the improved valuation of the diversified and high-quality business. Furthermore, the aggressive capital return program and self-help opportunities warranted an upgrade for S&P Global Inc. stock. Clinch concluded that the stock looks attractive on a risk-adjusted basis compared to its competitors and provides a potential upside opportunity of over 11.1% from the closing price as of November 30. S&P Global Inc. is in the final phase of the multiyear restructuring plan that will unlock value for investors.
Baron Funds has a long-term bullish outlook on S&P Global Inc. as one of the best quality stocks. Here’s what the firm said about the company:
“Shares of rating agency and data provider S&P Global Inc. (NYSE:SPGI) fell 9% during the third quarter due to continued weak debt issuance activity and headwinds to the Indices business from equity market declines. Credit markets were exceptionally soft during the quarter with non-financial corporate bond issuance down 36% for investment grade and down 84% for high yield, reflecting greater investor risk aversion, rising interest rates, and a drop-off in M&A activity. We believe this ratings weakness is temporary and diversification benefits from the acquisition of IHS Markit should support earnings growth next year. Over the long term, the company should continue benefiting from the secular trends of increasing bond issuance, growth in passive investing, and demand for data and analytics, while enjoying meaningful and durable competitive advantages that, in our view, are only strengthening following the merger with IHS Markit.”
3. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 140
Apple Inc. is a Cupertino, California-based technology giant.
Apple Inc. is considered amongst the best quality stocks as it has performed considerably well as opposed to its mega-cap rivals, which have lost around 30% to 75% this year. In comparison, Apple Inc. has lost only 16% of its value YTD. In a research note published on November 22, T. Michael Walkley at Canaccord commented that the demand for the premium-priced iPhone 14 Pro and iPhone 14 Pro Max is hovering around elevated levels. However, the production of these models has come under pressure due to the fresh restrictions in China following the COVID-19 outbreak. This will cause a delay in deliveries and push the sales into the March quarter. However, Apple Inc. is expected to overcome the supply-chain issues in the near future and continue on its growth trajectory. The analyst has given Apple Inc. stock a Buy rating with a target price of $200.
Here’s what Wedgewood Partners said about Apple Inc. in its Q3 2022 investor letter:
“Apple Inc. (NASDAQ:AAPL) grew revenues +5% (foreign exchange adjusted and excluding Russia) driven by record iPhone revenues that were up about +3% on an exceptional year ago comparison of +50%. Apple’s installed base is over 1.8 billion devices which helps drive a software and services business that has generated almost $80 billion of revenue over the past 4 quarters. As we have highlighted in the past, Apple’s relentless focus on the development and integration between hardware (especially ICs) as well as software, continues to add significant value for customers of its products and services. We expect this favorable competitive dynamic to continue for the foreseeable future.”
2. Mastercard Incorporated (NYSE:MA)
Number of Hedge Fund Holders: 146
Mastercard Incorporated (NYSE:MA) is a Harrison, New York-based payment processing company that has the distinction of being the second biggest payment processing entity in the world.
In an update issued to investors on October 28, Ashwin Shirvaikar at Citi assigned Mastercard Incorporated a target price of $400 and maintained a Buy rating on the stock. Mastercard Incorporated posted strong Q3 results that outperformed consensus estimates. Furthermore, numerous data points in the results highlighted the resiliency of the average consumer spending pattern. Like other market observers, the analyst was surprised by the company’s “expense guidance” for Q4 2022. However, he thinks that there is still significant upside potential to be offered by Mastercard Incorporated stock.
Baron Funds shared its outlook on one of the best quality stocks in its Q2 2022 investor letter. Here’s what the firm said:
“The Fund’s holdings in the Payments and Information Services themes also contributed to relative performance. Within Payments, lower exposure to this lagging theme and outperformance of Mastercard Incorporated (NYSE:MA) added the most value. These global payment networks are viewed as safe havens during market downturns but are also benefiting from resilient payment volumes and a sharp rebound in international travel.”
Akre Capital Management was the leading hedge fund investor in Mastercard Incorporated during Q3 2022.
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 269
Microsoft Corporation is a Redmond, Washington-based diversified technology company.
The company is betting on the expanding gaming industry through its $68.7 billion acquisition of Activision Blizzard, Inc. (NASDAQ:ATVI) announced in January 2022. The deal is currently in the middle of regulatory approval. Furthermore, Microsoft Corporation is preparing for the next growth frontier by expanding the footprint of its cloud computing platform Azure. Organizations around the world are adopting cloud computing solutions to avoid high expenditures on IT infrastructure. On November 22, Colin Sebastian at Baird upgraded Microsoft Corporation stock to an Outperform rating and assigned a target price of $95.
Here’s what Diamond Hill Capital said about Microsoft Corporation in its Q3 2022 investor letter:
“Also among our bottom contributors were media and technology giant Alphabet, software and IT services provider Microsoft Corporation (NASDAQ:MSFT) and insurance company American International Group (AIG). Microsoft shares declined in Q3, along with other tech companies, as rising interest rates impacted the near-term outlook. We expect the business to continue to generate strong revenue growth and benefit from operating leverage. Microsoft’s cloud computing services business, Azure, is generating robust growth, confirming its competitive positioning.”
Microsoft Corporation was held by 269 hedge funds as of Q3 2022.
You can also take a peek at the 10 Best Artificial Intelligence Stocks Under $10 and the 10 Best Cryptocurrency Stocks To Invest In.
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