https://www.stockopedia.com/articles/quality-and-value-are-positive-signs-for-ferrexpo-240645/
Quality and value are positive signs for Ferrexpo
Mon 9:36 by Ben Hobson
Shares in Ferrexpo (LON:FXPO) are currently trading at 382.4p, but a key question for investors is how the economic turmoil caused by Covid will continue to impact the share price.
Part of the answer depends on whether the stock is well positioned to weather economic shocks and ride out market volatility. To do that, it's worth looking at its profile to see where its strengths lie.
The encouraging news is that Ferrexpo has at least some of the characteristics often associated with two influential factors in investment returns: high quality and a relatively cheap valuation.
To understand where that emerges, here's a closer look:
Buying quality at a fair price
Good quality stocks are loved by the market because they tend to be solid and reliable companies. Profitability is important, but so is the financial strength of the company. A track record of improving finances is essential.
One of the quality metrics for Ferrexpo is that it passes 9 of the 9 financial tests in the Piotroski F-Score. The F-Score is a premier accounting checklist for finding stocks with an improving trend of financial health. A good F-Score indicates that the company has strong quality characteristics.
While quality is important, no one wants to overpay for a stock, so an appealing valuation is also important. With a weaker economy, earnings forecasts across the market are unclear. But there are some valuation metrics that can help, and one of them is earnings yield.
The earnings yield compares a company's earnings to its market valuation (determined by dividing its operating profit by its enterprise value). It gives you a total value of the stock (including cash and debt), which makes it easier to compare different stocks. In percentage terms, the higher the earnings yield, the better the stock is valued.
A rule of thumb for a reasonable earnings yield could be 5%, and the earnings yield for Ferrexpo is currently 43.7%.
In summary, good quality and relatively cheap valuations are indications of the stocks that are most attractive to contrarian value investors. Although no stock is immune from a sudden setback, some of the world's best investors focus on quality and value.
Among these stocks are real mispricings. Once the market recognizes that these quality companies are on sale, these prices often rebound.
What does this mean for potential investors?
Finding good quality stocks at low prices is a strategy used by some of the world's most successful investors. But be warned: these factors do not guarantee future returns, and we've identified some problem areas with Ferrexpo that you can learn about here.
Alternatively, if you want to find more stocks that show signs of high quality and value, just check out this Quality and Value screen.
