Is Nexus Infrastructure well placed to resist volatility?
An important question for small-cap investors right now is whether the current geopolitical and economic uncertainty will affect the share prices of companies like Nexus Infrastructure.
The stock is currently trading at 213p, but to predict how the price will move over the next 12 months, it's worth assessing its ability to withstand economic shocks and ride out market volatility.
Nobody has a crystal ball, but research shows that stocks that are good quality and have strong momentum are often better able to handle these kinds of challenges. That's because good quality stocks tend to be resilient, cash-generating businesses that can compound investment returns over time. And those with strong momentum in price and earnings have a habit of beating expectations.
The promising news is that Nexus Infrastructure scores well against some important financial and technical measures, and has at least some exposure to both high quality and strong momentum...
Why quality stocks pay off
When it comes to stock analysis, company quality tends to show up in high profitability and 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 Nexus Infrastructure is its 5-year Return on Capital Employed, which is a solid 18.2%. Good, double-digit ROCEs can be 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 is evidence of this at Nexus Infrastructure, where the share price has seen a 12.4% 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 Nexus Infrastructure that you can find out about here.
Stockopedia helps individual investors make confident, profitable choices in the stock market. Our StockRank and factor investing toolbox unlocks institutional-quality insights into thousands of global stocks. Voted “Best Investment Research Tools” and “Best Research Service” at the 2021 UK Investor Magazine awards.