A key takeaway from the stocks picked by the large-cap quality screen 12 months ago was that 'you get what you pay for'. Indeed, I decided it would be wise to scrap the screen’s old valuation test, which sought to identify 'cheap' quality stocks, in favour of a test that ensured shares were reassuringly (but not excessively) expensive. The reason for this was that the screen, based on its old criteria, had almost exclusively highlighted shares in housebuilders. While there are high-quality and low-quality housebuilders, the general characteristics of the sector (significant cyclicality, operational gearing and balance sheet risks) mean no housebuilder can really be regarded as high quality compared with the market as a whole.
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