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October 2022

Staying Focused on High-Quality Stocks

Key Points

Focusing on quality


Remaining overweight US stocks


Our higher for longer thesis intact

Macro developments remain supportive of CNR’s view of higher for longer in the battle against inflation, unprecedented geopolitical macro uncertainty, higher than consensus forecasts for the Fed Funds rate and recession risks and below consensus forecasts for GDP and corporate profits. The bear market in equities is likely to continue until these headwinds abate. Given this, we continue to believe that the most prudent and fiduciarily prudent path is to stay focused on high-quality stocks, especially those with higher exposure to the US economy.

We have a proprietary approach to defining quality stocks, including factors such as ROE, revenue and earnings stability and cash flow conversion, among others. As illustrated in the chart, the weighted average quality rank of stocks in our US Core Equity Strategy is higher than those in the S&P 500. Additionally, we seek out companies with strong management teams, high market share, durable franchises, selling at reasonable prices.

The stocks we hold have the right blend of offense and defense. That is to say, regardless of the level of slowdown in the economy in coming months these companies should do better than most and can be expected to come out on the other side with a stronger outlook for superior revenue and earnings growth relative to their industry group peers and the broader market. Examples of high-quality companies include AMZN, COST, UNH, CTAS, ADBE, among others. High-quality stocks do not always outperform the broader market averages, with 2022 being a case in point, but over the longer term they historically do. Given this, we think staying focused on high-quality stocks is the best course of action during these turbulent times.


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