Quality and momentum are highly prized among investors looking for reliable investment ideas. That's because good quality stocks tend to be resilient, cash-generating businesses that can compound investment returns over time. And research suggests that positive trends in price and earnings can often persist.
The Japan Tobacco (TYO:2914) share price is currently trading at ¥2,409. But given the heightened state of geopolitical and economic uncertainty, the question now is what the future holds for it.
To try and predict where Japan Tobacco will head next, it's worth knowing its potential strengths and weaknesses. The promising news is that it appears to score well against some important financial and technical measures, and has at least some exposure to both high quality and strong momentum...
Here is why that's important:
Why quality matters...
When it comes to stock analysis, company quality tends to be revealed 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 obvious signs of accountancy or bankruptcy risk.
One of the quality metrics for Japan Tobacco is its 5-year Return on Capital Employed, which is 12.9%. Long-term, double-digit ROCEs can be a hallmark of companies with the power to grow very profitably.
...and why momentum is 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.
There are signs of this at Japan Tobacco, where the share price has seen a 21.0% 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, a combination of high quality and momentum can be clues in the search for shares with the potential to 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 Japan Tobacco that you can find out about here.