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Why value and momentum could propel the Medusa Mining share price higher

Fri 11:40am by Ben Hobson

Buying cheap shares that are 'on the move' is a value investing strategy with a momentum twist - and there are signs that Medusa Mining (ASX:MML) could be a stock that suits this approach.

Over the past 30 years, finance academics and industry professionals have reached broad agreement about the factors that really drive stock market profits...

Buying stocks that are undervalued is one of them. Buying stocks that trending higher is another. Look for both factors simultaneously and you've got the makings of a powerful "value & momentum" investment strategy.

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

GET MORE DATA-DRIVEN INSIGHTS INTO ASX:MML »

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%. Medusa Mining beats this with an Earnings Yield of 41.6%.

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. Medusa Mining is well below this level, with a Price to Sales ratio of 0.85.

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 be 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. Medusa Mining’s Relative Strength over the past 6 months stands at 21.7%.

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 Medusa Mining 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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