Buying quality products when they are on sale is a trading strategy used by some of the world’s largest investors – including Warren Buffett. After the economic turmoil of last year, there are signs that stocks like Dcc (LON: DCC) could fit this bill. But how do you know that?
the Dcc share price has moved -7.67% in the past three months and is currently traded at 5,684p.
In uncertain conditions, many investors are keen to buy what they think cheap stocks – but this can be a mistake. It’s important to know the difference between a real bargain and a value trap – and often they are quality the share makes the difference.
The encouraging news is that Dcc has at least some of the characteristics that are often associated with two influential factors in investment return: high quality and a relatively cheap valuation.
To understand where they appear, take a closer look here:
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Quality stocks you can rely on
Good quality stocks are loved by the market because they tend to be solid and reliable companies. 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 Dcc is that it goes 7th of 9 Financial tests in the Piotroski F-Score. The F-Score is a top accounting checklist for finding stocks with an improving trend in financial health. A good F-Score indicates that the company has strong quality characteristics.
Shopping at a fair price
Quality is important, but nobody wants to overpay for a stock, so an appealing valuation is also important. Given a weaker economy, profit forecasts across the market are unclear. But there are some metrics that can help, and one of them is ROI.
Return on earnings compares a company’s profit to its market valuation (determined by dividing its operating profit by its business value). It gives you 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 is rated.
A rule of thumb for a reasonable return on earnings could be 5%, and the return on earnings for Dcc is just 6.89%.
In summary, good quality and relatively cheap valuations are indications of the stocks that are most attractive to contrarian value investors. There are real mispricing among these stocks. Once the market realizes that these quality companies are on sale, these prices often rebound.
What does this mean for potential investors?
Finding good quality stocks at great prices is a strategy used by some of the most successful investors in the world. But be warned: these factors do not guarantee future returns and we have identified a few problem areas with Dcc 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.