The January sell-off exposed the fact that investors were still pushing money into low quality stocks compared to quality names.

“Despite the very weak market performance in the latter part of January, it was still the low quality names that showed the best returns overall last month, whilst managing positive absolute performance in many regions,” says a research report from SocGen analysts Andrew Lapthorne, Rui Antunes, John Carson, Georgios Oikonomou, Michael Suen and Josh Cherian. “Low quality did underperform during the market decline, as you would expect, but the extent of the “risk-off trade” was not enough to offset the strong outperformance of low quality earlier in the month.”

High quality vs. low quality stocks

The SocGen report analyzes the results of their popular investment screens applied to stocks in the developed markets. The analysts used the Merton model to screen global stocks in January and the chart below illustrates the point.

low quality stocks

SocGen’s value screeners

“The more value driven Greenblatt and Graham & Rea screens were also off in most regions. The Graham & Rea screen was down -2.3% globally, only showing positive performance in Japan (2%). The Greenblatt model had a wider decline overall (-4.3%) despite advancing 2.4% in the UK and 3.1% in Japan,” observe the analysts.

It is interesting that value-driven stocks in Japan have stood up to the selling pressure seen since the start of this year – investors seem to be bent on cashing in on the whopping 50%+ gains seen in Japanese stocks in 2013 as seen in the chart of the Nikkei 225 below.

2-socgen-nikkei low quality stocks

Value names

Here ais SocGen’s list of companies appearing on the Graham & Rea and the Greenblatt Magic Formula screens:

Graham & Rea model

3-socgen-g-and-r low quality stocks

Greenblatt’s Magic Formula

4-socgen-magic low quality stocks

Tobacco and activism on the Greenblatt list

Note the number of tobacco names that appear in the Greenblatt list. Reynolds American, Inc. (NYSE:RAI), Lorillard Inc. (NYSE:LO), and Altria Group Inc (NYSE:MO) appear at ranks of 2, 4 and 14 respectively.

Also note that Herbalife Ltd. (NYSE:HLF) appears at value rank 18, even though activist investor Bill Ackman would think otherwise!

On the flip side, Carl Icahn would likely be gratified to see Apple Inc. (NASDAQ:AAPL) (in which he has a $3B investment) right up there at rank 10.