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StockRanks - upgrades and downgrades - September 30th

This column usually focuses on companies that have moved up, or dropped down, the QVM rankings. We will take a slightly different approach this week and focus solely on companies that have jumped in the QualityRank.

It is true that market factors like quality, value and momentum can be extremely volatile when used independently, but the chart below shows that companies with a high QualityRank (green) have outperformed the market average (blue) since May 2013. Will quality stocks continue to outperform?

Netcall

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EQNgZxnZHhQ5j9iTaDV3o56zmAKd9XTGPefrUc80

No-one likes to call a company before getting put on hold and listening to cheesy music for about ten minutes. This helps to explain the strong demand for Netcall's (NET) products, such as Queuebuster, which offers a free telephone call-back service. Netcall is indeed a dynamic growth company that provides software to make telephone call handling more efficient.

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Revenues have grown each year since 2009, while earnings have grown consistently since 2011. The company has done particularly well by selling software to the NHS. Demand for health services is rising. If spending cuts mean that the NHS needs to employ fewer telephone staff, call-back software could be used to remind people of their appointments.

This company caught my eye because it almost qualifies for Stockopedia's Zulu and Naked Trader screens, given that the company has a consistent record for growing earnings. However, it could be that the growth has already been factored into the share price.

The company has a high P/E ratio of 37 on a historic basis and 22 on a forecast basis. This is the main reason why the company fails to qualify for the Zulu and Naked Trader screens. Earnings are expected to grow by 43% over the next 12 months, but if they don't, the share price has a long way to fall.

Nevertheless, the company has a rising QualityRank of 93 - up 6 points from last week. The balance sheet looks strong, with no gearing and a current ratio of 1.9. The firm also has operating margins (12%) that are wider than two thirds of UK listed companies.

Compass

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dnftH_PzDn1BGrtM-exjs-ZdOeQt-VV_2p5xo1ka

The catering giant, Compass (CPG) has a QualityRank of 94 - up 6 points from last week. The company's share price enjoyed a solid run in the aftermath of the 2008 crash, partly because catering services could have been regarded as a good defence during the economic storm.

The company has also grown revenues each year since 2008. This trend has occurred as a growing number of schools, hospitals and healthcare centres - particularly in the US - have started to outsource their catering services. Indeed, outsourcing has helped the company offset declining European sales as the company restructured in response to low demand in the eurozone countries.

The company also has a solid ROCE (16%) which is higher than 83% of UK listed companies. Compass' sheer size could enable the firm to run its business on an economy of scale basis. The company is also improving its capacity to service long-term debt. Last year, the debt/asset ratio was 21. This year, it stands at 20.8.

Perhaps this quality is already reflected in the share price. The company's P/E ratio is closing on 20 and the overall ValueRank is 53. However, the company has enjoyed recent share price momentum, having beaten the market by 12% over the last year and gaining an overall MomentumRank of 72.



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