The Dow Jones Industrial Average and the Nasdaq Index are both close to entering correction territory, with the Dow currently down 8.3% from its closing record set on February 10, while the Nasdaq is also nearly 8% away from its historical closing high on October 29 last year. However, although the S&amp;P 500 Index is currently only about 5% off its historical high, the market remains overly optimistic about the impact of the current war on corporate profits and the overall economy.
<h2>There is Theoretical Support for Trading Junk Stocks</h2>
As the situation in the Middle East escalates, oil prices have bounced around the $100 level. Who would have thought that after witnessing negative oil prices a few years ago, we now have the opportunity to witness another historical moment? Some analysts suggest that if the impact of international oil prices continues (despite Trump's desire to end hostilities quickly), junk stocks may continue to be traded, lacking technical support but having theoretical backing. Of course, most people would find this hard to believe, as the global order is in chaos, hegemony is at play, and key shipping routes are obstructed by war. Shouldn't we be seeking quality stocks as a safe haven or trading concepts like AI as a moat in such turmoil? When you suggest buying quality stocks, it can be quite annoying, as if to say, &#34;Are you telling me to buy junk stocks?&#34; But in reality, as The Economist suggests, now may be the time to turn to junk stocks for treasure hunting.
In fact, the concept of quality is relative; it is not like other clearly defined measurable factors such as size, value, or momentum. &#34;Quality&#34; has a rather loose meaning. Investors interpret it differently, including concepts like profitability growth, earnings stability, investment patterns, and even more ambiguous aspects like corporate governance.
In 2015, Nobel Prize-winning economist Eugene Fama from the University of Chicago published a paper proposing the narrow &#34;profitability factor,&#34; which involves buying shares of highly profitable companies while shorting loss-making companies. Perhaps because directly stating &#34;profits are good, losses are bad&#34; is too superficial and straightforward, predecessors simply referred to it as quality stocks.
What are the specific measurement standards for investors regarding quality stocks? Most agree that they should include high and stable income levels, with profits ideally showing continuous growth; relatively low debt levels are even better, especially during highly uncertain times. In early March, when Wall Street's fear index rose to its highest level since the tariff panic in April last year, the VIX was around 35-36, primarily due to the threat of war between the U.S. and Iran, particularly concerning global oil supply. However, as early as the end of February, the quality stock sub-index within the S&amp;P 500 had already seen a decline greater than the overall market; the MSCI World Quality Index also performed poorly.
In simple terms, over time, the market capitalization of high-growth companies increasingly aligns with so-called quality companies. This is exemplified by the seven tech giants in the U.S. stock market, where, apart from Tesla, the other six companies have reliable profit growth, with some increases even being astonishing, while their market capitalizations have also significantly inflated, both in absolute terms and as a proportion of the overall market. However, the overlap between growth stocks and quality stocks has created a negative effect. The value of growth stocks largely derives from investors' expectations of higher profits; regardless of how well a company has performed in the past, there remains uncertainty
In a chaotic world, high-quality stocks are facing greater blows, and as the future becomes increasingly uncertain, investors' demands for &#34;forward&#34; cash flows become higher and harder to achieve. In such circumstances, quality does not equate to safety. Consequently, those low-quality stocks that have been left behind in terms of growth are valued more based on &#34;spot&#34; earnings visibility. Although they may seem inconspicuous at ordinary times, the limited short-term variables make them feel more stable.
<h2>Focus on Short-Term Earnings, Minimal Impact from Long-Term Risks</h2>
Referring to the S&amp;P 500 index, if we categorize the lowest fifth of industries based on so-called quality, we find that consumer discretionary, financial services, and healthcare companies account for a large proportion, with oil also holding a position. Observing the historical performance of low-quality stocks after a sharp rise in oil prices (over 35% increase within three months), the global benchmark Brent crude oil has risen about 50% since mid-December last year (as of March 18, Brent crude was approximately $101 per barrel, having retreated from earlier peaks but still remaining high). A basket of low-quality stocks averaged an 8% increase six months after the surge, while high-quality stocks averaged only a 4% increase. Therefore, the advice to only buy high-quality stocks may ultimately be wrong.
The &#34;junk stocks&#34; we refer to here are not the junk stocks commonly mentioned by retail investors in Hong Kong. Instead, they are low-quality stocks purchased under specific and sudden circumstances of high oil prices and increased geopolitical uncertainty, particularly in sectors such as energy (directly benefiting from oil prices), financial services, consumer discretionary, and healthcare (focusing on short-term earnings with minimal impact from long-term risks). Using AI, we identified the following two S&amp;P 500 stocks that align with this strategy, along with two other semi-shadow stocks.
ExxonMobil (XOM) is traditionally a major upstream energy giant, directly benefiting from high oil prices (Iran supply risks), with a strong cash flow in the energy sector among low-quality stocks. Chevron (CVX) is also a large oil producer, performing steadily since oil prices have risen nearly half since the end of last year, aligning with the data showing &#34;low-quality stocks&#34; outperforming after a sharp rise in oil prices.
Additionally, Imperial Oil (IMO) is one of Canada's largest integrated energy companies, primarily engaged in the exploration, production, refining, and sale of crude oil and natural gas. Its business focuses on oil sands and traditional upstream, with profits highly dependent on oil prices. Suncor Energy (SU) is another leading integrated energy company in Canada, covering oil sands extraction, in-situ production, upgrading, refining, and retail. Oil sands are core to its business, and profits are highly correlated with oil prices. It can be said that Imperial Oil and Suncor Energy are even more typical than Exxon and Chevron, as the cyclical nature of Canada's oil sands business leads to greater profit volatility and more direct impact from oil prices, with a half stake in Longfor's oil company Cenovus. The risk is that if oil prices fall due to the end of wars or a significant decrease in demand, cyclical stocks will experience larger declines.
JiuLiSheng Facebook page
Related articles: Are mining ETFs considered HALO trading? | JiuLiSheng

002806

000668

002809

002807

002820

002826

High oil prices may benefit low-quality stocks, although the market is overly optimistic about the impact of war on corporate profits. The Dow Jones and Nasdaq indices are nearing correction territory, with the S&P 500 index down about 5% from its historical high. Analysts believe that if international oil prices continue to rise, junk stocks may continue to attract attention. Investors have a vague definition of quality stocks, which typically includes profitability, stability, and low debt levels. In the current market environment, shifting towards low-quality stocks may represent a new investment opportunity

High oil prices benefit low-quality stocks? | Jiuli Sheng