High-quality stocks perform better in the long run. But what exactly is a high-quality stock? One answer: a stock with price stability.

The proof comes from Investment Executive’s latest study of price stability. It covers 166 stocks with 11-year price histories, most of them are dividend-payers, including most large-cap stocks in the Canadian stock market.

The study covers market performance to Dec. 31, 2010. In brief, this is what it reveals:

> The 10 stocks with the best price stability — the least volatility over 11 years — gained by an average of 188% in the past 10 calendar years. The 10 stocks with the least stability (greatest volatility) dropped by an average of 29%.

> The 50 stocks with the best price stability gained by an average of 147% over 10 years. The bottom 50: a gain of 59%.

The pattern is similar for price performance over the five-year period ended Dec. 31, 2010:

> The top 10 stable stocks gained by an average of 33%; the bottom 10 gained by an average of 3%.

> The top 50 stocks in price stability gained by an average of 17%, vs an average loss of 2% for the bottom 50 stocks.

These results come from IE’s occasional study of price stability; the previous study appeared in the Mid-November 2009 issue.

The study uses one of the earliest efforts to determine what identifies investment quality, developed by Arnold Bernhard, founder of Value Line Investment Survey in New York. Back in the 1940s, he found, to his surprise, that price stability was better at identifying long-term success in the market than earnings growth.

Bernhard’s analysis is simple. It requires no more than 11 years of annual high and low stock prices for data and simple arithmetic for the seven-step calculation.

Many researchers, including those with Value Line, have since developed complex methods of measuring investment quality. It is doubtful these measurements perform any better in identifying investment quality than Bernhard’s price stability ratio. Like so many pioneers of investment analysis, he had uncovered a simple truth.

The accompanying table lists the 40 stocks with the best price stability ratios in IE’s survey. Once again, pipeline operators Enbridge Inc. and TransCanada Corp. are high in the scoring.

Although Enbridge and Trans-Canada have market capitalizations of $23 billion and $29 billion, respectively, not all companies in the top 40 are large-caps. Emera Inc., the Nova Scotia power utility, ranks third in the list with a market cap of $3.3 billion.

But the market says the next two stocks in the list are really small-cap issues: Clairvest Group Inc. ($223 million) and High Liner Foods Inc. ($199 million).

The least stable companies on the list of 166 stocks are not total losers, but they sure are volatile. Descartes Systems Group Inc., for example, has gained by 92% in the past five years; however, over 10 years, it has lost 80% of its value. Theratechnologies Inc. has dropped by 55% in 10 years but has gained by 411% in the past five years.

Bernhard’s price stability calculation requires 11 years of price history. It includes an adjustment for an extended price trend to prevent that trend from influencing the stability calculation. IE