Shares in Euromoney Institutional Investor (LON:ERM) are currently trading at 789 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 market price in Euromoney Institutional Investor shares has moved by 11.7% over the past three months. In volatile markets, many investors are keen to buy what they think are cheap stocks - but it's essential to recognise the difference between a genuine bargain and a value trap. Often, the quality of the stock makes all the difference.
The good news is that Euromoney Institutional Investor scores well against some important financial and technical measures. In particular, it has strong exposure to two influential drivers of investment returns: high quality and a relatively cheap valuation.
To understand why that matters, here's a closer look:
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 stand out quality metrics for Euromoney Institutional Investor is that it passes 6 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 Euromoney Institutional Investor is currently 7.72%.
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 mispricing can be found. Once the market recognises 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 Euromoney Institutional Investor that you can find out about here.
Alternatively, if you'd like to find more shares that are showing signs of having strong quality and value, just come and take a look at this Quality & Value screen.