Shares in Nitto Denko (TYO:6988) are currently trading at ¥9,100 but a key question for investors is how much a prolonged spell of economic uncertainty will impact the price.
The answer comes down to judging whether Nitto Denko is well placed to ride out economic shocks. To do that, you have to look at its profile to see where its strengths lie.
The promising news is that it shows signs of scoring well against some important financial and technical measures. In particular, it has areas of exposure to two influential drivers of investment returns: high quality and strong momentum.
Here is why that's important...
Why quality stocks pay off
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 interesting quality metrics for Nitto Denko is its 5-year Return on Capital Employed, which is 13.0%. Good, double-digit ROCEs can be 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 appears to be true at Nitto Denko, where the share price has seen a 17.4% 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 cheaper prices.
What does this mean for potential investors?
Finding good quality stocks with strong momentum behind them 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 Nitto Denko that you can find out about here.