In the eyes of many investors, the valuation of a share is a key factor when it comes to deciding whether or not to buy it. After all, some of the biggest names in finance - from Buffett to Klarman to Greenblatt - insist that the way to make money in shares is to buy them when they’re marked down, mispriced and out of favour.
Sure enough, there’s no argument that value investing is a well-proven strategy. But it ignores a section of the market that almost always looks pricey - and in some cases looks terribly expensive. So does that mean that highly-rated, richly-priced shares are worth avoiding? The answer is not if you switch up some conventional investing rules and look for factors, other than value, that can generate the outperformance you want.
Two other factors that have been shown to be predictors of stock market profits are ‘quality’ and ‘momentum’. And when you mix strong quality and momentum in shares that appear expensively-priced, you enter the territory of High Flyers.
With a Quality-Momentum (QM) Rank of 90, Britvic (LON:BVIC) fits the profile of a High Flyer. But what does this say about the company as an investment?
Why do High Flyers soar?
Despite their expensive prices, High Flyers soar because of a blend of quality and momentum that drives them forward. They’re not infallible - and they can fall sharply if and when they slow down - but until that happens the returns can be eye-catching.
Company quality - which covers solid profitability, efficiency and strong and improving finances - is highly desirable for many investors. It can be a byword for resilience and dependability, and the market pays up for it.
In turn, momentum - both in terms of price and earnings acceleration - is one of the most powerful return drivers in the market. When quality interacts with momentum, more and more investors buy in and bid up prices. Success begets success, and as momentum builds in high quality stocks, they can soar.
So the fact that Britvic is classified as a High Flyer is a promising first step and suggests that this stock is backed up by strong Quality and Momentum characteristics.
Find the rockstars of the stock market
High Flyers are great stocks to have in your portfolio if you think you need more momentum or quality - just look out for signs that momentum might be changing. If you want to see which other stocks qualify as High Flyers, you can find a comprehensive list on Stockopedia's StockRanks page.
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