The iShares MSCI USA Quality Factor ETF (QUAL) is an ETF managed by BlackRock (BLK) with the objective of investing in high-quality U.S. stocks. QUAL’s investment thesis requires a stock to exhibit lucrative return metrics, a robust balance sheet, and a sound market share.
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The current economic environment has an appetite for quality stocks, as they provide the most resistance to rising interest rates and general contractions of the economy. Thus, I’ve identified three iShares MSCI USA Quality Factor ETF-owned stocks that I’m bullish on.
Nike (NKE)
Consumer cyclical stocks usually don’t perform well during economic downturns. However, Nike holds a solid market position, allowing it to be a counter-cyclical stock.
The apparel giant revealed illustrious organic sales growth in its latest earnings report, released earlier this year. Nike’s Direct sales and Brand Digital sales grew 15% and 19%, respectively, implying that the firm’s growth trend could last into perpetuity.
Furthermore, Nike’s return metrics are in good territory. First of all, its return on common equity of 45.74% is 26.7% higher than its five-year average, implying that investors’ money is being deployed efficiently. Secondly, Nike’s levered free cash flow margin (7.74%) adds to the argument that the firm’s return metrics are sound, as it provides cash-based evidence.
Nike stock is considerably undervalued. The stock’s price-to-earnings ratio is at a 31.6% discount to its five-year average, meaning that the market hasn’t yet priced the firm’s earnings-per-share potential. Moreover, Nike’s TTM PEG ratio of 0.42 implies that the company’s earnings-per-share growth is outstanding and underpriced.
Turning to Wall Street, Nike earns a Moderate Buy consensus rating based on 19 Buys and seven Hold ratings assigned in the past three months. The average NKE stock price target of $158.70 implies 33.8% upside potential.
Apple (AAPL)
Apple’s strength lies in its integration strategy. The firm’s ability to integrate vertically with software and hardware offerings allows it to obtain synergies that few enterprises have. Additionally, Apple’s horizontal integration stems from a wide range of product offerings that cater to various markets with unique use cases.
Furthermore, Apple’s constant will to innovate is probably what will continue setting it apart from its competitors. For instance, the company’s working on entering the “buy now, pay later” market with an iBank offering that will allow users to split their Apple Pay purchases into installments.
The stock is undervalued from a quantitative vantage point, as Apple’s price-to-earnings ratio of 24x is accompanied by a TTM PEG ratio of 0.64x. In addition, Apple’s balance sheet and income metrics embody its growth potential, with its return on equity standing at an astounding 149%.
Turning to Wall Street, Apple earns a Strong Buy consensus rating based on 21 Buys and six Hold ratings assigned in the past three months. The average Apple stock price target of $187.22 implies 31.3% upside potential.
Visa (V)
UBS (UBS) analyst Keith Parker recently included Visa in his list of quality stocks to buy that could survive a recession. Visa has an enormous market share, assisting it in smoothing its top-line earnings. The company’s interlinkage to e-commerce growth and pandemic re-openings means that it’s a strong prospect at the moment.
Visa’s CFO, Vasant Prabhu, recently elaborated on consumer spending and stated that: “You’re seeing the pendulum swing, and so, where we see the greatest growth right now is in things people couldn’t do before like travel, like restaurants, like entertainment, and so on.”
Prabhu’s claims can be substantiated by Visa’s earnings momentum. During its second quarter, Visa beat its earnings target by 14 cents per share, as payment volumes rose by 17% year-over-year. Moreover, the company’s cross-border transactions increased 47% during the quarter, conveying the importance of re-openings to the firm’s business model.
From a quantitative point of view, Visa’s quality stems from its profitability metrics and balance sheet. The latter is illustrated by the company’s Piotroski score, which stands strong, at 8, demonstrating sound operational efficiency. While the prior can be backed up by Visa’s impressive return on common equity ratio of about 40%.
Turning to Wall Street, Visa earns a Strong Buy consensus rating based on 14 Buys and two Hold ratings assigned in the past three months. The average Visa stock price forecast of $267.81 implies 29.9% upside potential.
Concluding Thoughts
Quality stocks will likely outperform the market for the foreseeable future, as they possess the necessary properties to sustain growth during economic downturns. BlackRock’s iShares MSCI USA Quality Factor ETF provides an array of significantly undervalued quality stocks. Nike, Apple, and Visa are the pick of the bunch.
