How To Identify A Quality Value Stock

The S&P 500 (INDEXSP:.INX) established its family of Quality Indices last week, arguing that quality is a risk factor distinct from size, value, momentum, low volatility that can be defined as a combination of other risk premia. While there may be broad agreement on whether a specific company is high quality, coming up with a quantitative measure that everyone can agree with is another matter. Fortunately, S&P Dow Jones Indices researchers Daniel Ung, Priscilla Luk, and Xiaowei Kang explain how the new indices measure Quality in a recent white paper (h/t AI-CIO).

Quality as a combination of profitability, earnings, and low leverage

Ung, Luk, and Kang argue that a high quality firm should be consistently profitable, have high earnings...