Morganlander: Quality has underperformed this year, but that's where you want to be long-term

Key Concepts: Quality Investing, Dividend Portfolios, Well Capitalized Companies, Consumer Staples, Health Care, Industrials, IBM, Data Center Companies, Rising Dividend, Balance Sheet Strength, Trading Multiple.

Market Outlook and Risk Management

Chad Morgenlander, Senior Portfolio Manager at Washington Crossing Advisors, observes a "strong surge" and a "really nice kind of market reaction for 2025." However, he advises investors to adopt a more cautious approach regarding portfolio risk, stating that "one needs to be a little bit more cautious about the type of risk that they put in their portfolio."

The Philosophy of Quality Investing

Washington Crossing Advisors' core investment philosophy, highlighted as their "word of the day," is "QUALITY." The firm believes that "over the long run, you want to be in quality and quality stocks." Morgenlander notes that "quality stocks this year have underperformed the riskier, more low quality companies." Consequently, the recommendation is to "move up the quality spectrum" by investing in companies within specific sectors such as "consumer staples, health care, as well as certain select industrials."

Defining "Quality" in Investment

Morgenlander provides a detailed definition of what qualifies and quantifies as "quality" in his investment strategy:

• Profitability and Growth: Quality companies are those that are "growing profitable."
• Capital Structure: They must be "well capitalized," which means they "don't have a lot of debt on their balance sheet."
• Valuation: These companies should be "trading at the right multiple."
• Dividend History: A significant and "very enduring kind of a watermark" for quality is a company that has an "increasing dividend over the long run."

Top Quality Dividend Pick for 2026: IBM

Specializing in constructing dividend and quality portfolios, Morgenlander identifies the technology company IBM as his top pick for 2026. His rationale is multi-faceted:

• Valuation Advantage: IBM is considered a "cheaper alternative to many of the data center companies that are being that are trading at such higher multiples."
• Dividend Growth: The company boasts a "rising dividend."
• Balance Sheet Strength: IBM possesses a balance sheet described as "very, very enduring, very strong," indicating robust financial health.

Synthesis and Conclusion

The central theme advocates for a strategic pivot towards quality investments, particularly those characterized by strong balance sheets, consistent profitability, reasonable valuations, and a track record of increasing dividends. Despite the recent underperformance of quality stocks, this approach is presented as the optimal long-term strategy. IBM is highlighted as a compelling example of a quality technology stock, offering a more attractively valued alternative compared to many high-multiple growth companies in the data center sector, underpinned by its strong fundamentals and rising dividend.