Buying quality commodities when they’re on sale is a trading strategy used by some of the world’s biggest investors, including warren buffet. After the economic turmoil we have experienced over the past year, there are signs that stocks like Galliford Try Holdings (LON:GFRD) could fit this bill. But how can you tell?
The Galliford Try Holdings share price has moved -7.56% over the past three months and is currently trading at 173.6p.
In volatile conditions, many investors are eager to buy what they think are cheap stocks – but that can be a mistake. It is important to know the difference between a real bargain and one value trap – and often, the quality stock made everything the difference.
The encouraging news is that Galliford Try Holdings 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 they appear, here’s a closer look:
Quality inventory you can count on
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 measures of quality for Galliford Try Holdings is that it passes seven of the 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.
Buy at the right price
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 earnings yield might be 5%, and the earnings yield for Galliford Try Holdings is currently 44.6%.
In summary, good quality and relatively cheap valuations indicate which stocks are among the most attractive to contrarian value investors. It is among these stocks that we can find real valuation errors. Once the market recognizes that these quality businesses are for 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 with Galliford Try Holdings which you can read about here.
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