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Shares in Calnex Solutions (LON:CLX) are currently trading at 164p but a key question for investors is how geopolitical and economic uncertainty will affect the price.
The answer comes down to judging whether it is well placed to withstand economic shocks. To do that, it's worth looking at the profile of the stock to see where its strengths are.
The promising news is that Calnex Solutions scores well against some important financial and technical measures. In particular, it has signs of exposure to two influential drivers of investment returns: high quality and strong momentum.
Decades of research shows that good quality stocks are more likely to be resilient, cash-generating businesses that can compound investment returns over time. Likewise, strong momentum in price and earnings is a pointer to stocks with positive trends that have the potential to continue.
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 quality metrics for Calnex Solutions is its 5-year Return on Capital Employed, which is 26.3%. Good, double-digit ROCEs are 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.
There are signs of this at Calnex Solutions, where the share price has seen a 74.9% 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 Calnex Solutions that you can find out about here.