Finding quality stocks in what could be a tougher year for investors

Published Tue, Jan 16 20242:37 PM ESTUpdated Tue, Jan 16 20243:08 PM EST

Investors may want to look at quality names as the market stalls. Traders have experienced a comedown from 2023's big advances after the new year kicked off. Case in point: After climbing more than 24% last year, the S & P 500 has inched down 0.2% since January kicked off. Much optimism hinges on the growing expectation that the Federal Reserve will cut interest rates this year. Traders are pricing in a better than 60% likelihood that the central bank will lower rates at its March policy meeting, according to CMEGroup's FedWatch Tool. That means investors could be in for disappointment — and market volatility — if the Fed's actual path for monetary policy diverges from what's expected. In a turbulent environment, traditional market wisdom suggests investors can be best served by having exposure to quality stocks. These names have consistent and strong earnings, low debt and steady share prices that are less likely to dive with a broader market sell-off. CNBC Pro looked for stocks that fit this bill using the screener tool available to subscribers. To find these names, CNBC Pro screened for stocks that have the following: Return on equity above 20%. Low debt, with a debt-to-equity ratio below 50%. Consistent earnings growth, with earnings per share increasing more than 5% over three years. Lower volatility, meaning they have a beta below 1. An average price target from analysts implying upside of at least 5%. Here's five that made the list: Big technology's Microsoft was among the stocks that passed the screen. The stock is part of a group of mega-cap tech names dubbed the "Magnificent Seven" that have been closely watched over recent months given their outsize role in driving up the market last year. Wall Street is bullish on Microsoft, with nine out of every 10 analysts polled by FactSet holding a buy or overweight rating. The average price target implies a gain of 6.2% over the next year, adding to its advance of more than 56% in 2023. Shares have climbed more than 3% in 2024. Wells Fargo's Michael Turrin recently hiked his price target on Microsoft to $435 per share from $425, seeing an "uplift" driven by artificial intelligence. "We see key AI-related product cycles taking shape as further upside," he said in a Monday report. MSFT 1Y mountain Microsoft's performance over the past year Medical device maker ResMed also made the list. The stock has been an underperformer, bucking 2023's market rally with a drop of more than 17%. Shares have slipped about 1% so far this year. But Wall Street expects a turnaround ahead, with the average price target from analysts surveyed by FactSet showing a potential jump of more than 5%. About three out of every four analysts rate the stock overweight or buy, per FactSet. Oil major Exxon Mobil was another stock that passed the screen. Exxon has underperformed recently, dropping more than 1% so far in 2024 and losing 9% in the prior year. RMD XOM 1Y mountain Resmed and Exxon's performance over the last year Slightly more than three out of every five analysts have a buy or overweight rating, according to FactSet. The average analyst also anticipates a better path ahead, with a price target reflecting an upside of about 24%. One of those optimistic analysts is Redburn Atlantic's Peter Low, who upgraded the stock to buy from neutral last week. "Exxon has always had the most compelling growth story among the Super Majors, but this has typically come with a valuation premium to match," he said. "However, following last year's underperformance this has narrowed, and on metrics such as FCF yield Exxon is now trading in line with peers."