Why quality and momentum matter to Big Yellow (LON:BYG)
Quality and momentum are highly prized by investors looking for reliable investment ideas. This is because good quality stocks tend to be resilient, cash-generating businesses that can compound investment returns over time. And research suggests that positive price and earnings trends can often persist.
the Big Yellow (LON: BYG) the share price is currently trading at 1464p. But with the economy barely recovering from the impact of the pandemic, the question now is what the future holds.
To try to predict where Big Yellow will head next, it’s worth knowing its potential strengths and weaknesses. The promising news is that it appears to be performing well against some important financial and technical metrics and is at least exposed to both high quality and strong momentum…
Here’s why it’s important:
Why quality matters…
When it comes to stock analysis, the quality of the company tends to show itself in high profitability and strong leading margins. These types of businesses are stable, growing, and often have accelerating sales and profits. They also have solid and improving financial histories, with no obvious signs of accounting risk or bankruptcy.
One of Big Yellow’s quality indicators is its 5-year return on capital employed, which is 10.1%. Long-term double-digit ROCEs can be a hallmark of companies with the power to grow very profitably.
…and why momentum is powerful
Positive dynamic trends are evident in stock prices and earnings growth. You can find the clues in stocks that are trading near their 52-week highs and outperforming the market. They will often exceed broker estimates and get forecast updates and recommendation changes.
There are signs of that at Big Yellow, where the stock price has returned 24.8% relative to the market over the past 12 months. Market volatility and economic uncertainty can significantly dampen momentum, but previously strong stocks can quickly rally when confidence returns.
In summary, a combination of high quality and momentum can be a clue in finding stocks that can deliver strong investment returns over many years.
In good times, these stocks can become expensive to buy. But in volatile markets, there may be chances to buy them at cheaper prices.
What does this mean for potential investors?
Finding good quality stocks with strong momentum behind them is a strategy used by some of the world’s most successful investors. But beware: these factors do not guarantee future returns and we have identified some areas of concern with Big Yellow which you can read about here.
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