Shares in Big 5 sporting goods (NSQ: BGFV) are currently trading at 2:65 p.m. However, an important question for investors is how the economic uncertainty caused by coronavirus will affect the price. One way to make this assessment is to examine where your strengths lie …
The Big 5 sporting goods The share price has moved 34.6% over the past three months. In volatile markets, many investors are interested in buying cheap stocks – but it’s important to tell the difference between a real bargain and a value trap. Often it is quality the stock makes the difference.
The encouraging news is that it exhibits at least some of the characteristics often associated with two influential drivers of investment returns: good quality and a relatively cheap valuation.
To understand why this is important, take a closer look at the following:
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Buy quality at a fair price
Good quality stocks are loved by the market because they are more of a solid and reliable company. Profitability is important, but so is the company’s financial strength. A track record in 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 top accounting-based checklist for finding stocks with an improving financial health trend. A good F-Score indicates that the company has strong quality characteristics.
While quality is important, nobody wants to overpaid for a stock, so getting a good valuation is also vital. In a weaker economy, profit forecasts across the market are unclear. However, there are a few metrics that can help, and one of them is the return on income.
Return on earnings compares a company’s profit to its market valuation (calculated by dividing operating profit by company value). You get a total value of the stock (including cash and debt), which makes it easy to compare different stocks. In percent, the higher the return on earnings, the better the share’s value.
A rule of thumb for a reasonable return on income might be 5%, and the Big 5 sporting goods return on income is currently 29.0%.
In summary, good quality and relatively cheap valuations are indicators of the stocks that are most attractive to investors of contrary value. There can be real mispricing among these stocks. Once the market realizes that these quality companies are for sale, these prices often rebound.
What does this mean for potential investors?
Some of the world’s most successful investors have a strategy of finding good quality stocks at affordable prices. But be warned: these factors do not guarantee future returns and we have identified a few problem areas in Big 5 Sporting Goods that you can learn about here.
Alternatively, if you want to find more stocks that show signs of high quality and high value, just check out this quality and value screen.