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Stock market volatility: Here's a mid-cap worth a closer look

Wed 8:09am by Ben Hobson

Shares in Gamma Communications (LON:GAMA) are currently trading at 1595 but the question for investors is how much the economic chaos of 2020 will impact on its price.

Part of the answer could come come down to whether it is well placed to ride out economic shocks and market volatility. To understand that, it's worth examining its profile to see where its strengths lie.

The promising news is that Gamma Communications shows signs of scoring positively against some important financial and technical measures. In particular, it has exposure to two influential drivers of investment returns: high quality and strong momentum.

Here is why that's is important...

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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 stand out quality metrics for Gamma Communications is its 5-year Return on Capital Employed, which is 26.6%. 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.

This is true at Gamma Communications, where the share price has seen a 63.7% 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 Gamma Communications that you can find out about here.

Alternatively, if you'd like to find more shares that are showing signs of having strong quality and momentum, just come and take a look at this High Quality & Momentum screen.

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1600p
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0.63%
Gamma Communications ( )

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