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An important question for small-cap investors right now is whether the current market uncertainty caused by Covid-19 will affect the share prices of companies like Inspired Energy.
Inspired Energy shares are currently trading at 15. To predict how the price will move over the next 12 months, it's worth assessing its ability to withstand economic shocks and ride out market volatility.
No-one has a crystal ball, but research shows that stocks that are good quality and have strong momentum are often best placed to handle these kinds of challenges. That's because good quality stocks tend to be resilient, cash-generating businesses that can compound investment returns over time. And those with strong momentum in price and earnings have a habit of beating expectations.
Why quality stocks pay off
When it comes to stock analysis, company quality tends to show up in high profitability and industry-leading margins. These kinds of firms are stable, growing and often have accelerating sales and earnings. They also have strong and improving financial histories with no signs of accountancy or bankruptcy risk.
One of the stand out quality metrics for Inspired Energy is its 5-year Return on Capital Employed, which is a solid 11.7%. Good, double-digit ROCEs are a pointer to companies that can grow very profitably.
Harnessing the power of momentum
Positive momentum trends show up in share prices and earnings growth. You can find the clues in stocks that are trading close to their 52 week high prices and outperforming the market. They’ll often be beating broker estimates and getting forecast upgrades and recommendation changes.
This is true at Inspired Energy, where the share price has seen a 45.7% return relative to the market over the past 12 months. Market volatility and economic uncertainty can be a major drag on momentum, but previously strong stocks can be quick to recover when confidence returns.
In summary, good quality and momentum are pointers to some of the best stocks on the strongest uptrends. This combination of factors can be a clue to finding shares that can deliver solid investment profits over many years.
In good times, these shares can become expensive to buy. But in volatile markets, there may be chances to buy them at knock-down prices.
Find the strongest shares in the stock market
Finding good quality stocks with strong momentum behind them is a strategy used by some of the world's most successful investors. If you want to find more shares that meet these rules, you can see a comprehensive list on Stockopedia's StockRanks page.