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Two factors that could impact on the G4S share price

12th Nov '20 by Ben Hobson

Research by some of the brightest minds in finance has shown that cheap stocks that are just catching the attention of the market can potentially deliver good returns. The findings show that a mix of Value & Momentum can be desirable in some shares - and there are signs that G4S (LON:GFS) might fit this strategy.

Quants, fund managers and institutional investors agree that value and momentum are influential factors. Whether it's investment legends like James O'Shaughnessy and Charles Kirkpatrick or modern day hedge fund giants like Cliff Asness... cheap stocks on the move hold great appeal.

But what is it that makes Value & Momentum such a successful stock market strategy and how does this apply to G4s (LON:GFS)?


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 can make sense. Value investors tend to have their own preferred techniques, but looking for a high Earnings Yield and low Price to Sales Ratio might be a useful place to start...

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%. G4S beats this with an Earnings Yield of 5.06%.

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. G4S is below this level, with a Price to Sales ratio of 0.44.

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. G4S’s Relative Strength over the past 6 months stands at 132%.

What does this mean for potential investors?

Finding good quality stocks at cheap prices 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 G4s 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 Value & Momentum screen.

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