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Why the market might be catching on to Hornbach Holding Ag & Co Kgaa

Fri 11:40am 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 excellent returns. The findings show that a potent mix of Value & Momentum can be very desirable in some shares - and there are signs that Hornbach Holding Ag & Co Kgaa (ETR:HBH) might be one of them.

Quants, fund managers and institutional investors agree that value and momentum are powerful 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 Hornbach Holding Ag & Co Kgaa (ETR:HBH)?


The value component…

Many analysts agree that cheap stocks have a tendency to outperform expensive stocks on average over time. Therefore, finding stocks with a high Earnings Yield and low Price to Sales can be a good place to start in identifying attractively priced stocks.

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%, Hornbach Holding Ag & Co Kgaa beats this comfortably, with an Earnings Yield of 12.1%.

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. Hornbach Holding Ag & Co Kgaa is well below this level, with a Price to Sales ratio of 0.26.

However, exposure to value as the only factor can increase the risk of finding value traps, which are cheap for a reason and often fail to recover.

… and the momentum driver

Although momentum inherently goes against investor psychology, it has proven to be one of the greatest tools investors can use when combined with other factors such as quality and value.

Trend following and momentum investing are often very effective strategies, although when momentum turns losses can mount quite quickly. Whilst value can take time to be realised momentum works very well during bullish, trending periods. 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 a good indicator that a share might continue its upward trend. Hornbach Holding Ag & Co Kgaa’s Relative Strength over the past 6 months stands at an impressive 59.6%.

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 Hornbach Holding Ag & Co Kgaa 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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