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Two factors that point to a possible re-rating at Mullen

Fri 11:40am by Ben Hobson

At a time of economic uncertainty and heightened market volatility, looking for mis-priced stocks with the power to rebound makes sense. For value investors looking to stack the odds in their favour, a dose of momentum could help to find shares that are re-rating. Based on this approach, it looks like Mullen (TSE:MTL) might be worth a closer look...

Value and momentum are two factors that finance academics and professionals generally agree are very influential sources of stock market profits. On their own, these strategies have solid track records. But blended together, they offer a powerful way of tracking down out of favour stocks that might just be recovering.

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

GET MORE DATA-DRIVEN INSIGHTS INTO TSE:MTL »

Take value…

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%. Mullen beats this with an Earnings Yield of 5.04%.

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. Mullen is well below this level, with a Price to Sales ratio of 0.79.

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 mix in momentum

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. Mullen’s Relative Strength over the past 6 months stands at 14.6%.

Next Steps

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 Mullen 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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