Quality and Fundamentals (Part 3)

The question being addressed in this mini-series is whether quality and/or fundamentals are important for stock analysis and what the difference may be between them.

I left off with mention of value stocks: an exception to the high-quality growth stock variety. Value stocks can and do show sales+EPS growth that is more tempered than the latter and akin to larger, mature companies that fall short of the Part 2 criteria (9% / 10% / 10%).

Academics have done much research to suggest value investing may be superior to growth investing over ultra-long time horizons. As of early 2026 per Google AI, value wins over 50, 60, 70, and 80 years ~11.4% (all percentages annualized) to ~10.6%, ~11.3% to ~10.1%, ~11.9% to ~10.3%, and ~12.4% to ~10.5%, respectively. Research by Fama and French suggests that since 1927, value has outperformed growth by an average of 4.4%.

More recently, however, growth has outperformed. Growth wins over the last 5, 10, 20, and 30 years ~15.2% to ~11.9%, ~14.6% to ~9.2%, ~11.4% to ~8.1%, and ~11.8% to ~9.5%, respectively. That Fama and French paper (“Value versus Growth: the International Evidence”) was published in 1998.

Most recently, value is bouncing back. Since late October 2025 (roughly 14 weeks), value has outperformed growth (Russell indices) by a [non-annualized] total of 14%.

Thanks to Google AI for doing the research but at best [worst] I regard these numbers and conclusions as approximate [patently false]. To be more confident, I would need to know exactly what indices or data sets were used in the calculations to ensure validity of the comparison (and check for survivorship bias among other things). I would also want to see inferential statistics to know if differences between percentages are likely fluke or more indicative of practical significance.

The BetterInvesting® preference for high-quality growth (as opposed to low-P/E value stocks) backs the criticism of my EOG study discussed in Part 1 and the Learn to Earn presentation in Part 2. Manifest Investing also focuses on the same. They target stocks with double-digit (especially over 12-13%) sales growth and higher Quality. Their Quality rating—designed to identify sustainable, low-risk, and consistent growth firms—measures financial strength, management effectiveness, and earnings predictability. Management effectiveness involves improving earnings growth over time, consistent/increasing ROE, and acceptable/decreasing Debt-to-Capital.

Before delving forward next time into earnings predictability, let me dissect one point of confusion from the first paragraph. I think Manifest Investing (and one-half of this year’s Learn to Earn tandem) would say high-quality growth stocks are stocks with good fundamentals. With regard to the Quality rating, do I think a stock with good fundamentals can fail to be high quality? Yes. Do I think a stock with a high Quality rating can fail to have good fundamentals? Not so much. I will therefore continue to treat them differently with this question outstanding: what matters most for the stock study [guide, or SSG]?

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