Quality meets growth: Why quality matters in growth investing

September 16, 2025

As the growth investing landscape continues to evolve, it’s worth remembering a timeless expression: “The more things change, the more they stay the same.” Growth investing, by its nature, tends to get energized by new and exciting themes, and investors’ enthusiasm is frequently concentrated on a handful of companies that disproportionately impact the market. Such frenzied moments in growth investing are often short-lived, however. When the excitement fades, one enduring trait stands apart: quality.

If we look to the past, it’s easy to come up with examples of stocks that, at one time, fit neatly into the market-driving investment theme of the day. Consider the examples below from three notable periods of high growth. Microsoft and Coca-Cola remain leading businesses in their industries today, while companies like Polaroid and Peloton may have failed to meet investor growth expectations in the long run. Ask yourself, which of the other names may have possessed the attributes of quality?

Our analysis shows that an investment strategy anchored in genuine quality demonstrates resilience through business cycles and can offer compounding benefits. Though many market participants may claim to adhere to a quality approach, we think there’s often a gap between the philosophical narrative and the reality. What accounts for that gap? Investor behavioral tendencies and biases. (More on that later.)

Inefficiency in growth investing

Active investing requires market inefficiencies – i.e. mispriced securities – to generate superior returns over time. These inefficiencies can sometimes be obscured by market sentiment or by other factors, but empirical evidence supports that stocks are often either over- or undervalued. In the growth universe, one of the primary signs of inefficient market behavior, in our experience, is the advantage one can gain by investing in high-quality companies instead of focusing solely on high growth.

Figure 1 focuses on growth stocks in two high-ranking categories: (1) the top quintile of “quality,” based on a measure of cash flow return on investment (CFROI), and (2) the top quintile of sales growth. These cohorts’ “persistence” is measured as the percentage of companies that can retain their top-quintile characteristics each year, through year five. The results show that companies with high growth rates are rarely able to maintain them and ultimately slow down. In fact, nearly 50% of top-quintile growth companies failed to retain their top-quintile characteristics after just one year. High-quality companies, on the other hand, have a much better track record of maintaining their high-quality characteristics. Conceptually, the data speak to the laws of capitalism: High-growth companies attract competitive pressures, which can erode their growth rates, market share, margins, and returns, unless they have a moat protecting their business model. Such a protective moat can be observed for quality companies in their sustained levels of CFROI, as shown in Figure 1.

Figure 1: High-quality vs. high-growth companies (1990-2022)

Source: Credit Suisse HOLT. Includes the top 1,000 US companies by market cap as of December 31, 2022. The chart displays the probability of top-quintile sales growth companies and top-quintile quality companies retaining their top-quintile status over the subsequent five years. The starting quintile of growth and quality is based on the level achieved in the fiscal year prior to measuring persistence (year zero). The level of growth is determined based on the level of sales growth in the last fiscal year of the rolling measurement period. The Credit Suisse HOLT Quality Factor assesses the relative operational attractiveness of firms based on the level and stability of CFROI. Chart is for illustrative purposes only. Past performance does not guarantee future results.

Quality growth companies also display better stock return characteristics. Over time, quality growth companies within the Russell 1000® Growth Index have a higher frequency of excess returns than hyper growth companies. Notably, there are periods where hyper growth outperforms. Look no further than the dot-com bubble of the late 1990s and the COVID-19 pandemic of 2020-2021, as seen in Figure 2. But the high failure rate of these companies ultimately destroys their value in the long run. Meanwhile, quality growth companies have higher odds of preserving value and, as a result, can provide more attractive long-term benefits for investors.

Figure 2: Compounding advantages of quality growth vs. hyper growth (1994-2022)

Sources: Credit Suisse HOLT, Macquarie. Companies are equally weighted, rebalanced monthly for the top 1,000 US companies by total market cap. The quality growth group is designed to identify firms with competitive advantages, above-average growth characteristics, and valuations that confirm the market’s favorable outlook. The hyper growth group is designed to identify early lifecycle growth companies, committed to high rates of reinvestment but showing limited profitability due to the pursuit of growth. Chart is for illustrative purposes only. Past performance does not guarantee future results.

Performance over the long term hinges on the strength of returns during up markets as well as resilience during down markets. Figure 3 shows the performance differential between quality growth and hyper growth companies during significant market drawdowns since 2006. Generally, quality growth companies experience less-severe drawdowns than hyper growth companies do, offering further evidence of the benefits that quality companies can provide investors in the long run.

Figure 3: Down markets favor quality

Source: Credit Suisse HOLT. Chart represents quality growth stocks’ performance relative to hyper growth stocks during significant market drawdowns, from 2006 to 2024. Companies are equally weighted, rebalanced monthly for the top 1,000 US companies by total market cap. The quality growth group is designed to identify firms with competitive advantages, above-average growth characteristics, and valuations that confirm the market’s favorable outlook. The hyper growth group is designed to identify early lifecycle growth companies, committed to high rates of reinvestment but showing limited profitability due to the pursuit of growth. Chart is for illustrative purposes only. Past performance does not guarantee future results.

Confronting investor biases

Extensive research has been conducted on investor behavior and biases, as the abundance of quantifiable data in investing provides fertile ground for gaining concrete insights into investor psychology. Studies have shown that investors often deviate from optimal judgment and decision making. The spectrum of behavioral tendencies contributing to bad investment decisions includes a host of common human biases, including the following examples showing how they could even play out in succession.

Recency bias. As investor behavior is often driven by a propensity to pursue “shiny objects,” recency bias could be observed, for example, when a company reports a quarter of exceptional growth, thereby reshaping investors’ expectations and perceptions of the business.

Extrapolation. Following this recalibrated perception of a company’s growth prospects, investors may then, in turn, extrapolate the company’s future growth expectations.

Fear of missing out (FOMO). As the stock price ascends on the revised expectations, the desire to partake in its success – the FOMO – intensifies.

Confirmation bias. Subsequently, the investment research process often becomes a quest to validate the continued stock appreciation and transformative shift in the company’s business model.

These ingrained human behaviors pose significant challenges for growth investors. The unpredictability of the future, coupled with a broad spectrum of possible outcomes, tends to magnify the appeal of potential returns and can lead investors away from a rational process. Growth investors frequently mistake high growth for a sign of quality, despite the contradictory evidence.

Changing the order of operations: Putting quality first

It would seem to make sense that growth investors should focus on growth first and foremost, right? But we know from empirical data that focusing on quality before growth has the potential to increase the odds of success. Importantly, because quality growth investing requires discipline, it’s critical to understand the common behavioral tendencies that can sabotage the search for quality names.

An investment process that prioritizes quality could look something like this:

1. Solve for quality. Determining quality is foundational. Focus on this, first and foremost, before exploring a company’s growth prospects.
2. Apply systematic tools. Define a research process and stick with it. This may help eliminate emotional biases.
3. Create a focus universe. Construct a universe of only the highest-caliber companies, to block the inherent distractions – yes, those shiny objects – associated with growth investing.

Conclusion

Quality investing is not immune to challenges and adverse sentiment, but it has historically navigated most market environments to emerge as one of the most reliable avenues for compounded investment returns. Our empirical evidence and experience affirm that quality investing has the potential to provide consistent, long-term value creation for investors.