shares in Big 5 sporting goods (NSQ:BGFV) are currently trading at $19.2 but a key question for investors is how the economic uncertainty caused by Coronavirus will affect the price. One way of making that assessment is to examine where its strengths lie…
the Big 5 sporting goods share price has moved by -55.5% over the past three months. In volatile markets, many investors are keen to buy what they think are cheap stocks – but it’s important to recognize the difference between a genuine bargain and a value trap. Often, the quality of the stock makes all the difference.
The encouraging news is that it has at least some of the traits that are often associated with two influential drivers of investment returns: high-quality and a relatively cheap valuation.
To understand why that matters, here’s a closer look:
Get data driven insights into NSQ:BGFV
Buying quality at a fair price
Good quality stocks are loved by the market because they’re more likely to be solid, dependable businesses. Profitability is important, but so is the firm’s financial strength. A track record of improving finances is essential.
One of the quality metrics for Big 5 Sporting Goods is that it passes 8th of the 9 financial tests in the Piotroski F-Score. The F-Score is a world-class accounting-based checklist for finding stocks with an improving financial health trend. A good F-Score suggests that the company has strong signs of quality.
While quality is important, no-one wants to overpay for a stock, so an appealing valuation is vital too. With a weaker economy, earnings forecasts are unclear right across the market. But there are some valuation measures that can help, and one of them is the Earnings Yield.
Earnings Yield compares a company’s profit with its market valuation (worked out by dividing its operating profit by its enterprise value). It gives you a total value of the stock (including its cash and debt), which makes it easier to compare different stocks. As a percentage, the higher the Earnings Yield, the better value the share.
A rule of thumb for a reasonable Earnings Yield might be 5%, and the Earnings Yield for Big 5 Sporting Goods is currently 42.4%.
In summary, good quality and relatively cheap valuations are pointers to those stocks that are some of the most appealing to contrarian value investors. It’s among these shares that genuine mis-pricing can be found. Once the market recognizes that these quality firms are on sale, those 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 world’s most successful investors. But be warned: these factors don’t guarantee future returns and we’ve identified some areas of concern with Big 5 Sporting Goods that you can find out about here.
Stockopedia helps individual investors make confident, profitable choices in the stock market. Our StockRank and factor investing toolbox unlocks institutional-quality insights into thousands of global stocks. Voted “Best Investment Research Tools” and “Best Research Service” at the 2021 UK Investor Magazine awards.