It’s important to remember that quality ultimately prevails, even during those fleeting moments when it may seem otherwise and inferior stocks surge ahead in the market. This is particularly evident in the performance of the Roundhill MEME ETF (MEME) this year, which has outperformed the S&P 500 (SPX) with an impressive year-to-date return, as illustrated in the accompanying chart.
However, if we expand our perspective ever so slightly, a vastly different story unfolds. Over the cumulative period since the beginning of last year, for instance, the MEME ETF has experienced a 42% loss, while the S&P 500 recorded a more modest 5% loss. This longer-term pattern has been observed consistently over the past 18 months, further supported by a study titled “Quality Minus Junk,” published in the Review of Accounting Studies in 2018. Conducted by Cliff Asness, Andrea Frazzini, and Lasse Pedersen, the study examined six decades of U.S. market history and three decades of history across 24 developed non-U.S. countries, revealing a distinct quality advantage over lower-quality investments.
That being said, it is important to note that not all meme stocks are inherently low quality. The Roundhill ETF selects meme stocks based on their popularity on social media platforms. However, as a general rule, social media popularity is driven by speculative factors rather than a belief in a stock’s long-term potential. It often stems from the allure of potentially enormous short-term gains. As indicated in the table at the end of this column, the ETF’s strategy tends to include stocks that are significantly more speculative than the overall market. For instance, over half of the stocks owned by the ETF have incurred losses during the preceding twelve months.
Conclusion
While brief periods of subpar quality may deceive us temporarily, it is crucial to recognize that quality investments consistently prevail in the long run. The Roundhill MEME ETF’s recent performance should be considered within the context of its long-term track record and the broader patterns identified in extensive market studies. Remember, quality is key when it comes to enduring success.
Quality Stocks: A Promising Opportunity
Quality stocks have historically shown strong performance during periods like the current one, where they have lagged behind. This presents an opportune moment to invest in quality stocks at attractive prices.
To identify these stocks, I have compiled a selection recommended by three or more investment newsletters that our performance auditing firm closely monitors. These stocks are not only undervalued relative to the S&P 500 but also excel in four different dimensions of value: price to earnings ratio, book value, sales ratio, and dividend yield. The table below showcases these stocks in alphabetical order.
| Stock | P/E Ratio | Book Value | Sales Ratio | Dividend Yield | |——–|———–|————|————-|—————-| | Stock1 | 17.2 | 1.3 | 0.9 | 2.5% | | Stock2 | 22.8 | 2.1 | 0.7 | 3.2% | | Stock3 | 12.6 | 1.7 | 1.2 | 2.8% | | … | … | … | … | … |
Comparing these stocks with the average stock held by the MEME ETF, their attractiveness becomes apparent. Over the past year, more than half of the MEME-owned stocks have experienced losses and lack the price to earnings ratio (P/E). Among those that do have a P/E, the average is 97.3, significantly higher than the S&P 500’s 26.1 and the quality stocks preferred by top-performing newsletters at 10.8. This pattern holds true for each of the other three value indicators as well. Data sourced from FactSet.
Based on historical trends, it is expected that the stocks listed above will outperform the stocks held by MEME in the long term.
Note: Mark Hulbert is a regular contributor.
