At a time of economic uncertainty and heightened market volatility, looking for mis-priced stocks with the power to rebound makes sense. For value investors looking to stack the odds in their favour, a dose of momentum could help to find shares that are re-rating. Based on this approach, it looks like Canadian Solar Inc NSQ:CSIQ might be worth a closer look...
Value and momentum are two factors that finance academics and professionals generally agree are very influential sources of stock market profits. On their own, these strategies have solid track records. But blended together, they offer a powerful way of tracking down out of favour stocks that might just be recovering.
So what financial measures can point to a strong blend of value and momentum, and how does Canadian Solar Inc stack up against them?
Many analysts agree 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 - and here's why...
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%. Canadian Solar Inc beats this with an Earnings Yield of 8.23%.
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. Canadian Solar Inc is well below this level, with a Price to Sales ratio of 0.42.
But BEWARE! Value on its own is risky. If there are no other positive factors at play, there's a chance you're looking at a value trap...
… and mix in momentum
Momentum makes this value strategy work harder. Signs of positive price momentum can be a clue that an attractively valued stock is starting to re-rate. Indeed, momentum has been shown to be a very predictable driver of stock market profits.
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 an indicator that a share might continue its upward trend. Canadian Solar Inc’s Relative Strength over the past 6 months stands at 8.65%.
Finding cheap stocks where momentum is positively turning around is no easy task, but Canadian Solar 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 Canadian Solar 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 Canadian Solar 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.