Could Quality and Value Be Key to Smiths News Stocks?
Good stocks at a low price are what the best investors are looking for. In this time of economic uncertainty, could Smith News (LON: SNWS) be one of them?
When it comes to proven drivers of stock market earnings, a mix of “good” and “cheap” is viewed as highly desirable by some successful investors. Research shows that expensive, low-quality stocks tend to underperform, while low-quality, high-quality stocks can generate much more reliable earnings on average over time.
Smiths News share price has moved 4.93% in the last three months and is currently trading at 39.4p. The encouraging news is that it possesses at least some of the traits that are often associated with of them influential drivers of return on investment: high quality and one relatively inexpensive pricing.
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Good quality stocks are popular in the market because they are more likely to be strong, reliable companies. Profitability is important, but so is the financial strength of the business. A history of improving finances is essential.
One of the quality measures for Smiths News is that it passes 8 from 9 financial tests in the Piotroski F-Score. The F-Score is a world-class accounting checklist for finding stocks with an improving financial health trend. A good F-Score suggests that the company has strong signs of quality.
While quality is important, no one wants to overpay for a title, so an attractive review is also vital. With a weaker economy, earnings forecasts are unclear across the market as a whole. But there are some valuation metrics that can help, and one of them is profit return.
Profit return compares a company’s profit with its market valuation (obtained by dividing its operating profit by its enterprise value). It gives you a total value of the stock (including its cash and debt), making it easy to compare different stocks. As a percentage, the higher the return on earnings, the better the stock’s value.
A rule of thumb for a reasonable profit return might be 5%, and the profit return for Smiths News is currently 20.0%.
In summary, good quality and relatively cheap valuations indicate which stocks are among the most attractive to contrarian value investors. It is among these actions that we can find a real pricing error. Once the market recognizes that these quality companies are on sale, those prices often rebound.
What does this mean for potential investors?
Finding good quality stocks at cheap prices is a strategy used by some of the most successful investors in the world. But beware: these factors do not guarantee future returns and we have identified some areas of concern with Smiths News which you can find out here.
Alternatively, if you want to find more stocks that are showing signs of solid quality and value, just come take a look at this Quality and Value screen.