What's in store for Softcat's (LON:SCT) shareholders?

Softcat (LON:SCT) is classified as a 'High Flyer' stock: a heady mix of high quality, high momentum, and low value.

Some of the market's biggest winners were a High Flyer at one point or another, but beware - this is a dangerous (if potentially lucrative) part of the market to play in.

Softcat (LON:SCT) is a mid cap stock in the IT Services & Consulting industry. The group is an IT reseller and IT infrastructure solutions provider to the corporate and public sector markets. Softcat is growing quickly - for the six months ended 31 January 2019, revenues increased 21% to £434m and net income increased 41% to £27.5m. 

When we analyse Softcat from a factor perspective, we find that it the classic factor profile of a High Flyer, with a: 

• Quality Rank of 98,
• Momentum Rank of 97, 
• Value Rank of only 18. 

A combination of high quality, high momentum and low value is great when earnings go up but a bad place to be when things go wrong. How likely is this to happen with Softcat?

Softcat (LON:SCT): flying high but is it safe?

So, High Flyers tend to be riskier and more volatile than the market average. But is this true of Softcat?

We can find out quickly by applying Stockopedia’s RiskRatings system, which divides stocks into five groups according to stock price volatility. The five classifications (from most to least volatile) are:

• Highly Speculative (30% of the market),
  
• Speculative (25% of the market), 
• Adventurous (20% of the market),
• Balanced (15% of the market), and
• Conservative (10% of the market)

Softcat is an adventurous stock. This means that the group is in the more volatile half of the market in terms of stock price volatility, as might be expected of a High Flyer. Those looking to invest here should prepare themselves for a potentially bumpy ride.

One thing in Softcat’s favour is its above average five-year return on capital employed figure of 52.6%. Being consistently profitable to such a degree over multiple years suggests that Softcat can back up its favourable factor exposures with some kind of economic moat and, hopefully, make any share price volatility more bearable in the short term.

This attractive blend of factors and profitability characteristics has been noticed by the market - Softcat has a one-year relative strength of 24.8%.

Find the rockstars of the stock market

High Flyers are great stocks to have in your portfolio if you think you need more momentum or quality - just look out for signs that momentum might be changing. If you want to see which other stocks qualify as High Flyers, you can find a comprehensive list on Stockopedia's StockRanks page.

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