Quality is Dead – Long Live Quality: Five Stocks for Your Buy List
November 4, 2025
10 min read
Quality Is Dead, Long Live Quality — Five Stocks for Your Buy List
Quality stocks are out of favour — yet their businesses thrive. Reliable cash flows, strong brands, steady growth make them undervalued — and more compelling today than at any time in recent memory. Our original analysis for The Market by NZZ — plus the extended investor's view for arvy readers.
The thesis on video — 1 minute
In 30 seconds — the core thesis
- Quality stocks' underperformance has reached 1999 extremes — the chart shows: last time quality champions were this far behind was during the dotcom euphoria. Rare enough to take notice.
- The businesses are thriving — valuations don't reflect that. What's underperforming aren't the business models. It's the multiples — because Mr. Market is buying the exciting and selling the steady.
- Exactly this inversion is the setup for the next phase. When quality stocks trade at reasonable valuations and their businesses keep compounding, that's one of the most attractive constellations a long-term investor can get.
The original analysis — the opening
Quality stocks: Academic research has long shown that high-quality businesses tend to outperform over the long run.
But there's a catch: you must let time do the heavy lifting — and allow compound interest to work its quiet magic. Why do quality businesses outperform? Because to be one, a company must first survive. It needs a strong balance sheet, operate in a market with structural tailwinds to obtain pricing power and high margins, and grow its top and bottom lines mostly organically. Add an honest, competent management team that can steer the ship through whatever storm comes next, and you have the makings of something durable.
The cherry on top? Earnings stability and visibility.
That's when you're looking at a true quality business — the kind we like to call a compounding tortoise. Slow. Predictable. Relentless. And over time, unstoppable. But even tortoises have their problems. Two, in fact.
They tend to trade at higher valuations, because everyone knows they're good.
They tend to underperform during market euphoria, when investors chase the shiny and forget the steady.
And funnily enough, we're seeing both of those patterns invert right now.
A few of the world's best quality businesses are trading at rather cheap valuations — precisely because they've been too boring for Mr. Market's taste. In his current "dot-com déjà vu" mood, Mr. Market has been selling them off with a level of enthusiasm that would make 1999 blush.
→ Read the full article with the five concrete stock picks on The Market by NZZ
Chart 1: High Quality Stocks' Underperformance is at 1999 extremes
Source: NZZ The Market
01The uncomfortable question: why now?
"Quality is currently out of favour" — that statement is statistically common. Quality regularly underperforms in phases of euphoric market sentiment because investors then buy the exciting and find the steady boring. What makes the current situation special — and what the NZZ analysis puts its finger on — is the depth of the underperformance. We're at 1999 levels, meaning at the extremes of the dotcom bubble. Such constellations occur rarely. When they do occur, they have historically not been the start of further quality decline — but often the build-up of subsequent multi-year outperformance.
The question that has to stay compact in an NZZ column is: what needs to happen for this statistical constellation to actually become outperformance — and what could prevent it? That's exactly what we want to break down in the next sections. Because "quality is cheap" is a necessary but not sufficient condition for the returns the historical comparison promises.
What 1999 vs. today teaches
In 1999 quality stocks like Coca-Cola, Johnson & Johnson, Procter & Gamble experienced similar relative weakness while TMT stocks rose explosively. What happened next is investment history: in the three years after March 2000, most "hot story" stocks lost 70–95% of their value. Quality stocks delivered positive returns in the same period. The point is not "quality must outperform like that in the next three years" — the point is that the valuation asymmetry is at a level where the historical probability distribution is significantly shifted in favour of quality.
02What makes a quality tortoise — the five criteria
Before talking about cheap valuations, we must be precise about what a real quality tortoise is. There are five criteria that must come together. Each individually is a good sign — all five together produce the kind of business that endures decades and builds wealth.
1
Strong balance sheet
Low debt, high liquidity, robust cash generation. The condition for getting through any crisis without forced sales or shareholder dilution.
2
Structural market position
Operating in markets with long-term tailwinds — demographics, digitisation, consumer trends. No bet on sub-sectors with uncertain shelf life.
3
Pricing power and high margins
Brands, patents, switching costs, or scale advantages that protect the company from margin compression. Operating margin stable or rising.
4
Organic top- and bottom-line growth
Growth from the business itself — not from acquisitions or financial engineering. In the 7–20% range (cf. Trees Don't Grow to the Sky).
5
Honest, competent management
Skin in the game, long-term orientation, capital-disciplined allocation. The human element that maintains the other four criteria over time.
+
The cherry: earnings stability and visibility
Predictable, steady cash flows from recurring revenue. That's what turns a good business into an investable good business.
When all these criteria are met, you have the mechanics of a compounding tortoise: a business that doesn't grow spectacularly but builds substance year after year, gains market share, raises prices slightly, generates cash, and reinvests. Over twenty years that compounds into a wealth-building machine that doesn't impress through glamour but through mathematical reliability.
The two "problems" of tortoises
The NZZ analysis names them openly: quality businesses typically trade at higher valuations (because everyone knows they're good), and they underperform in euphoria phases (because the exciting attracts more investors). What's special right now: both problems are inverted. Valuations are unusually low and underperformance is unusually extreme. This double inversion is the setup the NZZ analysis talks about.
03What this means for your quality portfolio
The practical question: what does one concretely do in this constellation? Here the honest answer matters, because blanket answers ("buy quality now!") miss the essential differentiations. Three structural distinctions every investor should make:
First differentiation — where is quality actually cheap? Not every defensive-sounding name is a quality bargain. Real quality tortoises are recognised by meeting all five criteria simultaneously. Some consumer staples brands trade cheaply right now because their structural market position is being eroded by private label. That's not a quality discount — that's a legitimately changed business model. Discipline means: cheap + quality, not "cheap + recognisable name".
Second differentiation — geography and sector matter. Quality is unevenly distributed globally today. European consumer champions trade at significant discounts to US peers because US investors pay premium valuations for US stocks. Pharma and med-tech have gone through their own structural weakness phases over the last five years (cf. Health Care companion). Industrial mid-caps with global presence often overlooked. Anyone saying "buy quality" should specify — which geographies, which sub-sectors, which business models.
Third differentiation — choose the valuation metric correctly. Standard P/E is for many quality businesses not a meaningful valuation metric. Free cash flow yield, earnings yield versus bond yields, or sum-of-the-parts at conglomerates often give more accurate pictures. Anyone staring at P/E and expecting everything below 20× to be "cheap" often misses the actual bargains.
| Investor profile | Currently typical quality allocation | What to review |
|---|---|---|
| "I follow the MSCI World" | Mix with significant US tech tilt | How much of it is quality vs. hypergrowth? Hidden concentration? |
| "I focus on US quality" | Microsoft, Visa, Apple etc. — premium-valued | Check geographic quality diversification — Europe, Switzerland, selected emerging markets |
| "I buy Swiss standards" | Nestlé, Roche, Novartis etc. — typically highly concentrated | Diversification across sectors and business models, not just Swiss mega-caps |
| "I avoid quality as 'too boring'" | Low — mostly in hypergrowth or tech | Structural gap in the wealth-building zone — consciously build up or not? |
How this quality selection logic is applied in practice — and why disciplined quality investors often find the best entry points in seemingly unattractive market phases — is deepened in our pillar article The Tortoise Problem: Why Quality Wins — When You Stay With It. The concrete arvy allocations are in the Q1 2026 Quarterly Report.
04Three scenarios for the next 18 months
Nobody can time when valuation asymmetries unlock — not us either. But we can describe the most plausible paths:
Bull Case
Multi-year quality comeback like 2000–2003
A market correction or the convergence of hypergrowth growth rates triggers a broad re-allocation into quality. The current 1999 extreme positioning reverses, quality champions deliver noticeable excess return over 24–36 months versus broad indices. Anyone who entered selectively today — not into consumer staples losers, but into real quality tortoises at reasonable valuations — comes through structurally better than broad index investors.
Base Case
Gradual mean reversion over 18–24 months, sharp differentiation
The valuation gap closes gradually, without dramatic break. Within quality there's strong differentiation — the real tortoises win, the "quality in name but not in substance" stocks lag. Selection decides performance, not blanket sector engagement. Our base case.
Bear Case
Extended hypergrowth phase, quality underperformance continues
The AI capex wave lasts longer than expected, hypergrowth champions keep delivering spectacular returns. Quality stocks lag for another 12–18 months, the valuation asymmetry becomes even more extreme. In this scenario the temptation is great to abandon quality discipline — exactly then it's most valuable. Historically the phases when "this strategy isn't working anymore" became the dominant conviction were the best entry points for the next 5–10 years.
How disciplined investors navigate exactly these psychologically difficult market phases — and why patience in quality strategies is structurally rewarded — is described in our pillar "Investing in Turbulent Times".
05What you should review now
An honest self-assessment takes 30 minutes and is the most valuable step an investor can take in a quality discount phase. Four concrete checks:
1. Quality share inventory. What percentage of your portfolio is in real quality businesses (all five criteria met) versus "apparent quality" stocks (recognisable name but business eroding) versus "hot story" stocks? For most retail investors the real quality share is lower than thought.
2. Mr. Market test. If you had 100% of your portfolio in cash today, would you allocate similar to current? Or would you in today's constellation buy significantly more quality compounders? The difference between your current allocation and what you'd theoretically build now is the gap you should gradually close.
3. Valuation discipline. Even in a quality discount phase: not everything that's cheap is quality. Do you have clear valuation thresholds for stocks on your watchlist? Or do you buy on "gut feeling" because it "looks cheap"? Disciplined buying needs disciplined valuation triggers.
4. Patience check. Quality investing rewards multi-year holding periods. If you build up now and the market runs against you for another 12 months, do you hold or capitulate? The honest answer decides whether you can win in this strategy at all — not the stock selection.
What disciplined investors do now
They don't panic-sell their hypergrowth positions to rotate into quality — that would be strategy hopping. They look at their quality gap honestly and build up gradually by directing new investments or savings plan amounts into real quality tortoises. Over 18–24 months the allocation shifts gradually. That's boring, less exciting to tell, and mathematically exactly what works. History rewards not the one who rotates most dramatically — but the one who sustains their strategy disciplined over long periods.
06Frequently asked questions
Which five quality stocks does the NZZ analysis specifically mean?
The five concrete picks and the rationale are in the NZZ original article — we deliberately link there because that's contractually the place where these recommendations appear. What we do here on arvy.ch is the quality mechanics behind it — the criteria by which we evaluate quality businesses. Anyone wanting to read the picks can do so in the NZZ original.
Does arvy invest in exactly these five quality stocks?
The exact sector and single-stock allocation is communicated transparently in our quarterly strategy reports. Generically: arvy's strategy has always been geared toward quality compounders — the five criteria from Section 02 are our standard lens for stock selection. Which concrete positions this currently produces is documented in the arvy Q1 2026 Quarterly Report.
What if the "1999 extremes" play out differently this time — an extended hypergrowth phase?
That's the bear case from Section 04 and a real risk factor. Nobody can guarantee that historical patterns repeat. What historical statistics show: in over 95% of cases when quality stocks reached these extremes of relative underperformance, 24–60 months later followed clear outperformance phases. That's not a guarantee but a probabilistic statement. Disciplined investors act on probability distributions, not on guarantees.
Are Swiss quality champions like Nestlé, Roche, Novartis a buy right now?
We don't give blanket single-stock recommendations — the answer depends too much on individual valuation, sector specifics, and personal portfolio context. Generically: Swiss quality champions are differently positioned structurally. Some operate in markets with real tailwinds and stable margin structure, others have structural challenges. Applying the five criteria from Section 02 as an individual lens is the better approach than blanket "Swiss standards = quality" assumptions.
Further reading — the thematic anchors of this analysis
The Tortoise Problem
The full quality investing logic behind it
arvy Quarterly Report Q1 2026
Current allocation transparently documented
Trees Don't Grow to the Sky
The growth zone behind quality (7–20%)
Investing with arvy: The Complete Guide
How this analysis fits the overall strategy
Investing in Turbulent Times
Quality discipline in psychologically difficult phases
Why arvy
The full strategy and positioning explanation
Quality is not dead — it's waiting
The provocative headline "Quality is dead, long live quality" is more than a wordplay. It precisely describes a market phase in which an investment strategy is declared dead — exactly at the moment its next big period begins. This is the historical mechanism that has made quality investing the long-term outperforming strategy: phases of broad scepticism are often phases of low valuations, and low valuations are the foundation for the next phase of above-average returns.
Not every tortoise is a quality tortoise. Not every cheap stock is a quality bargain. The discipline to apply the five criteria — balance sheet, market position, pricing power, organic growth, management — and the patience to let compounding work, are the two characteristics that separate long-term successful quality investors from the majority of market participants. Both are hardest in moments of overshoot — and most valuable.
Original written by Thierry Borgeat, Co-Founder of arvy, for The Market by NZZ. The extended arvy companion piece reviewed by Patrick Rissi, CFA and Florian Jauch, CFA. Data sources: NZZ The Market, own analyses, academic literature on quality factor investing. Last updated: April 2026.
Disclaimer: This article is for general educational purposes and does not constitute personal investment advice. The security designations mentioned are illustrative and not buy or sell recommendations. Past performance is no guarantee of future results. Scenarios are assessments, not forecasts. arvy is a FINMA-supervised asset manager with a CISA licence (Art. 24). Imprint & Legal Notice.
