Why quality and momentum matters for Greggs (LON:GRG)
Quality and momentum are highly prized among investors looking for reliable investment ideas. That's because good quality stocks tend to be resilient, cash-generating businesses that can compound investment returns over time. And research suggests that positive trends in price and earnings can often persist.
To try and predict where Greggs will head next, it's worth knowing its potential strengths and weaknesses. The promising news is that it appears to score well against some important financial and technical measures, and has at least some exposure to both high quality and strong momentum...
Here is why that's important:
Why quality matters...
When it comes to stock analysis, company quality tends to be revealed 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 obvious signs of accountancy or bankruptcy risk.
One of the quality metrics for Greggs is its 5-year Return on Capital Employed, which is 17.6%. Long-term, double-digit ROCEs can be a hallmark of companies with the power to grow very profitably.
...and why momentum is powerful
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 Greggs, where the share price has seen a 13.0% 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, a combination of high quality and momentum can be clues in the search for shares with the potential to 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.
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