Why quality and momentum could be key drivers for Tata Elxsi

An important question for mid-cap investors right now is how the current uncertainty caused by Covid-19 will affect the share prices of companies like Tata Elxsi.

Tata Elxsi shares are currently trading at 2738.2. 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.

No-one has a crystal ball, but research shows that stocks that are good quality and have strong momentum are often better placed 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.

On that basis, Tata Elxsi scores well against some important financial and technical measures and has signs of exposure to these high quality and strong momentum factors...

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 quality metrics for Tata Elxsi is its 5-year Return on Capital Employed, which is 40.8%. 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.

There are signs of this at Tata Elxsi, where the share price has seen a 134.3% 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 Tata Elxsi that you can find out about here.