When Expensive Stocks Are Worth the Price

  • Caring about valuation doesn’t mean everything in a portfolio must be cheap.
  • If your goal is to generate strong, risk-adjusted total returns, it’s important to have balanced exposures in your equity portfolio, especially in times of great uncertainty.

When working to maximize risk-adjusted returns in a highly uncertain investment landscape like the current one, it’s important to consider how balanced exposures within an equity portfolio will perform in different market environments. If we in Active Quantitative Equity (AQE) were to choose stocks today for our defensive equity portfolios based only on valuation, for example, we would end up with a portfolio comprising banks, autos, insurers, and some cyclical industrials — i.e., stocks that are cheap but which may be undervalued for some very good reasons.

That’s why there’s a lot more to investing than just valuation, and why AQE’s investment approach includes additional exposures that can help generate strong, risk-adjusted returns. In fact, we currently like some segments of the market that look quite extended based on valuation ratios alone; we like them for other reasons.

Although we believe it’s important not to overpay for stocks, it’s perfectly acceptable — indeed, it can be desirable — to hold a stock that looks expensive based on valuation ratios alone if that stock provides other benefits. The ability to balance out macro exposures could be one such benefit. The stock could exhibit very strong quality characteristics that are worth paying up for; it could have some wind beneath its wings (e.g., having captured the attention of informed investors, leading to positive price trends); or it could simply help to diversify the overall portfolio.

The portion of our own global defensive portfolio that is currently invested in the most expensive third of the market includes companies with positive growth and strong sentiment, some high-quality attributes that make a valuation justified, and either low volatility or diversification from a risk perspective. Our choices include some household products, basic retail, food retail, restaurants, food and beverage, and residential REITs. Many of these holdings have consistent and stable earnings — a characteristic that is highly sought-after during times of economic uncertainty. We wouldn’t want to dedicate an entire portfolio to these sectors and these investment themes, but gaining a balance is key.

It may be impossible in this market environment to find a diversified collection of stocks that each tick all of the boxes, but what’s important is to build a portfolio that balances cheap valuation, positive sentiment, high quality, and low risk. Across the developed world, we see some expensive stocks that are worth holding across North America and Europe. The segments that these stocks fall within are listed below, according to the dimensions on which we find them attractive (see table). In sum, caring about valuation doesn’t mean everything in the a portfolio must be cheap;
rather, we believe that everything in a portfolio must help to achieve a clear goal.

Figure 1: Expensive Stocks that Are Worth Holding
North America and Europe

  High Quality Neutral Quality
Good Sentiment

US Food Danish Medical Products

Dutch comm services

Swiss Food

French medical products

US Restaurant

US Household products


Swiss materials

Finnish capital goods

US Electric Utilities

Neutral Sentiment

Danish materials

Swiss capital goods

Spanish utilities


Source: State Street Global Advisors analysis, as of 31 May 2020. Valuation is determined using State Street Active Quantitative Equity’s proprietary valuation metrics; all sectors that appear are in the most expensive third of companies in our stock-selection universe, which in this case consists of companies in the MSCI World Index.

About State Street Global Advisors

For four decades, State Street Global Advisors has served the world’s governments, institutions and financial advisors. With a rigorous, risk-aware approach built on research, analysis and market-tested experience, we build from a breadth of active and index strategies to create cost-effective solutions. As stewards, we help portfolio companies see that what is fair for people and sustainable for the planet can deliver long-term performance. And, as pioneers in index, ETF, and ESG investing, we are always inventing new ways to invest. As a result, we have become the world’s third-largest asset manager with US $2.69 trillion* under our care.

*This figure is presented as of March 31, 2020 and includes approximately $51.62 billion of assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.