Is there turnaround potential in the Encore Capital Inc share price?

For value hunters in the stock market, the chance to buy cheap stocks when they are just starting to move higher is the ultimate ambition. In periods of uncertainty, finding genuinely mis-priced shares that really are in recovery mode is a big challenge, but there are signs that Encore Capital Inc (NSQ:ECPG might be one of them.

It's no coincidence that finding value stocks 'on the move' is a popular strategy. This combination of value and momentum is a heavily researched and well documented approach. Like all value investing strategies, it can be hard to stick with, but decades of research shows that it has the potential to reap solid returns.

So what indicators can point to a strong blend of value and momentum, and how does Encore Capital Inc stack up against them?

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The value component…

An age-old observation in equities is that cheap stocks have a tendency to outperform expensive stocks on average over time. So, finding stocks that are cheap against some classic valuation measures makes sense. Looking for a high Earnings Yield and low Price to Sales Ratio can be a good place to start...

The Earnings Yield takes a company’s profits and compares it to its current market valuation (enterprise value). Using the enterprise value takes into account cash and debt and the calculation gives us a good idea of the total value of the stock. Expressed as a percentage, a high Earnings Yield is a good sign of value. A good rule of thumb can be to look for an Earnings Yield above 5%. Encore Capital Inc beats this with an Earnings Yield of 8.77%.

The Price to Sales ratio tells us how cheap/expensive a company is relative to its current sales. The calculation is quite straightforward, taking the current share price and dividing this by its sales per share. A Price to Sales ratio of less than 1 is said to offer good value. Encore Capital Inc is well below this level, with a Price to Sales ratio of 0.79.

However, exposure to value as the only factor can increase the risk of finding value traps, which are cheap for a reason and often fail to recover.

… and the momentum driver

Although momentum inherently goes against human psychology, it has proven to be one of the greatest tools investors can use when combined with other factors such as value.

Trend following and momentum investing are often very effective strategies, although when momentum turns losses can mount quite quickly. Whilst value can take time to be realised momentum works very well during bullish, trending periods. To assess price momentum we can use Relative Strength, which compares the share price change to the underlying market index over a specified period of time.

Outperformance and strong momentum is a good indicator that a share might continue its upward trend. Encore Capital Inc’s Relative Strength over the past 6 months stands at 7.69%.

Next Steps

Finding cheap stocks where momentum is positively turning around is no easy task, but Encore Capital Inc seems to have good qualifying attributes. It is always important to carry out further due diligence on a stock before making any final buying decisions though. The Encore Capital Inc StockReport is a good place to start. A StockReport contains a wealth of information about a company’s value, quality and momentum characteristics and its historical financial data.

If you’d like to find more potential Value & Momentum stocks like Encore Capital Inc, then check out Stockopedia’s screening tool. Our team of financial analysts have carefully crafted this Value & Momentum screen set up, but you can also scour for stocks in the market using your very own customised screening parameters. You can find out more about how Stockopedia’s screener works here.