Good stocks at great prices are what the best investors look for. In this time of economic uncertainty, Big 5 sporting goods (NSQ:BGFV) be one of them?
When it comes to the proven drivers of stock market gains, a mix of “good” and “cheap” is considered highly desirable by some successful investors. Research shows that low-quality, expensive stocks tend to underperform, while high-quality, cheap stocks can, on average, deliver much more reliable gains over time.
Big 5 Sporting Goods stock price has moved -18.0% over the last three months and is currently trading at $15.9. The encouraging news is that it shares at least some of the characteristics often associated with two influential drivers of investment returns: high quality and a relatively cheap rating.
Here’s an idea of where you can see that:
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Good quality stocks are loved by the market because they tend to be solid, 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 Big 5 Sporting Goods is that it passes 8th of 9 Financial tests in the Piotroski F-Score. The F-Score is a premier accounting checklist for locating stocks with an improving trend in financial health. A good F-Score indicates that the company has strong quality characteristics.
While quality is important, nobody wants to pay too much for a stock, so an appealing valuation is also crucial. With a weaker economy, earnings forecasts are unclear across the 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 operating income by enterprise value). It gives you a total value of the stock (including cash and debt), making 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 might be 5%, and the earnings yield for Big 5 sporting goods is currently 51.2%.
In summary, good quality and relatively cheap valuations point to the stocks most attractive to contrarian value investors. There are genuine mispricings among these stocks. Once the market recognizes that these quality companies are for sale, these prices often rise again.
What does this mean for potential investors?
Finding good quality stocks at cheap 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 have identified some problem areas in Big 5 Sporting Goods which you can read about here.
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