Is a re-rating under way in the Olainfarm As share price?

Buying shares at knockdown prices, just when the market is starting to re-rate them is a powerful approach to stock-picking. Finding these kinds of shares is hard - but there are signs that Olainfarm As RSE:OLF1R could be one of them.

What makes this strategy so appealing? Well, value investing is a well-proven approach to buying shares, but over the years some of the world's most respected investors have shown that it works better when you mix in momentum.

Traditionally, value and momentum are well known to be effective at different times in the market cycle. When one is flying the other is usually falling. But add them together and you've got a much more predictable approach.

So what financial measures can point to a strong blend of value and momentum, and how does Olainfarm As stack up against them?

The value component…

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%. Olainfarm As beats this with an Earnings Yield of 21.9%.

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. Olainfarm As is well below this level, with a Price to Sales ratio of 0.75.

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 the momentum driver

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. Olainfarm As’s Relative Strength over the past 6 months stands at 10.3%.

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