Quality and value are positive signs for Vesuvius
Shares in Mount Vesuvius (LON:VSVS) are currently trading at 380.4p, but a key question for investors is how the economic turmoil caused by Covid will continue to affect the price.
Part of the answer is to judge whether the stock is well positioned to weather economic shocks and weather market volatility. To do this, it is worth looking at his profile to see where his strengths are.
The encouraging news is that Mount Vesuvius has at least some of the traits that are often associated with of them Influencing factors of investment return: high quality and one relatively cheap valuation.
To understand where this appears, here’s a closer look:
Buy quality at the right price
Good quality stocks are valued by the market because they are more likely to be strong and 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 Vesuvius is that it passes 9 from 9 financial tests in the Piotroski F-Score. The F-Score is a world-class accounting checklist for finding stocks with a trend of improving financial health. A good F-Score suggests that the company has strong signs of quality.
While quality is important, no one wants to pay too much for a stock, so an attractive valuation is also essential. With a weaker economy, earnings forecasts are unclear across the broader market. But there are some valuation metrics that can help, and one of them is earnings yield.
Earnings Yield compares a company’s earnings to its market valuation (calculated by dividing its operating earnings by its enterprise value). It gives you a total stock value (including its cash and debt), making it easy to compare different stocks. As a percentage, the higher the earnings yield, the better the stock value.
A rule of thumb for a reasonable profit yield might be 5%, and the profit yield for Vesuvius is currently 8.07%.
In summary, good quality and relatively cheap valuations indicate which stocks are among the most attractive to contrarian value investors. While no stock is immune to a sudden setback, focusing on quality and value is what some of the best investors in the world do.
It is among these stocks that we can find real valuation errors. Once the market recognizes that these quality businesses are on sale, these 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 regarding Vesuvius which you can read about here.
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