Economic shockwaves caused by Covid-19 have plunged stock markets into turmoil, but some shares are better able to absorb this volatility than others - and L'oreal Sa (EPA:OR) could be one of them.
To understand why different shares respond to chaos in different ways, it pays to look at their strengths...
In bull markets, investors gravitate to speculative, unproven growth stocks as a means of achieving the best returns. But these stocks collapse first in a crisis.
By contrast, high quality shares often get overlooked in bull markets. But it's these stocks that are best at keeping their momentum and recovering quickest from periods of volatility.
Shares in L'oreal Sa are currently trading at 247.7 but a question in the minds of many investors is how the price will respond to the Covid-19 uncertainty.
The answer is that the signs are positive. L'oreal Sa scores well against some important financial and technical measures and has strong exposure to two influential drivers of investment returns: high quality and strong momentum.
So why are these two factors important and where are the clues hidden?
When it comes to stock analysis, company quality tends to show up in high profitability and strong 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 L'oreal Sa is its 5-year Return on Capital Employed, which is a solid 16.1%. Good, double-digit ROCEs are a pointer to companies that can grow very profitably.
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 L'oreal Sa, where the share price has seen a 16.5% 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.