Why Smiths News could be well positioned to recover from volatility

Research shows that quality and value are two powerful drivers of stock market earnings. After the economic turmoil we have experienced over the past year, it is possible that these two factors have an influence on the News from the blacksmiths (LON:SNWS) share price.

For contrarian investors looking for stocks overlooked by the market, quality and value are key clues. Academic studies show that good quality, cheap stocks can outperform on average over time. It is therefore not surprising that these rules are used by some of the most respected investors in the world – from Joel Greenblatt at warren buffet.

the Smiths News Stock Price has moved -7.47% over the past three months and is currently trading at 35.3p. But what’s interesting about this stock is its potential exposure to these influential profit drivers of high quality and one relatively cheap valuation.

Here’s an idea of ​​where you can see this:

Good quality

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 company. A history of improving finances is essential.

One of the measures of quality for Smiths News is that it passes 8 from 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.

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 profit to its market valuation (calculated by dividing its operating profit 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 Smiths News is currently 21.2%.

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 on 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 Smiths News which you can read about here.