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The Macfarlane (LON:MACF) share price is currently trading at 122.5p. But given the uncertain economic outlook, the question now is what the future holds for it.
To try and predict where the Macfarlane price will head next, it's worth knowing its strengths and potential weaknesses. The encouraging news is that it appears to stack up well against some important financial and technical measures...
Specifically, it's a small-cap share with strong exposure to two of the most influential drivers of investment returns in the stock market: high quality and strong momentum.
Quality and momentum are highly prized among investors. Good quality stocks are more likely to be resilient, cash-generating businesses that can compound investment returns over time. Strong momentum in price and earnings is a pointer to stocks with positive trends with the potential to continue.
To understand why quality and momentum are so important in a share like Macfarlane, here's a close-up view:
Why quality matters...
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 Macfarlane is its 5-year Return on Capital Employed, which is 14.1%. Good, double-digit ROCEs are a pointer to companies that can grow very profitably.
...and why momentum is so powerful
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 Macfarlane, where the share price has seen a 0.46% 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 compound investment returns 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 Macfarlane that you can find out about here.