Why Yancoal Australia could appeal to contrarian value investors

Why Yancoal Australia could appeal to contrarian value investors

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Contrarian value investors are always on the look-out for shares that the market has overlooked. In times of economic uncertainty - when stock prices become erratic - good quality stocks can become cheaper. The question is whether Yancoal Australia (ASX:YAL) is currently one of them.   

Buying good quality stocks at cheap prices is a popular stock market strategy - but it isn't always easy to tell the difference between a genuine bargain and a value trap. Often, it's the quality of the stock that makes all the difference.

The Yancoal Australia share price is currently trading at A$5.24. And the promising news is that it has some of the traits that are often associated with two influential drivers of investment returns: high quality and a relatively cheap valuation.

To understand where they show up, here's a closer look:

Buying quality at a fair price

Good quality stocks are loved by the market because they're more likely to be solid, dependable businesses. Profitability is important, but so is the firm's financial strength. A track record of improving finances is essential.

One of the quality metrics for Yancoal Australia is that it passes 9 of the 9 financial tests in the Piotroski F-Score. The F-Score is a world-class accounting-based checklist for finding stocks with an improving financial health trend. A good F-Score suggests that the company has strong signs of quality.

While quality is important, no-one wants to overpay for a stock, so an appealing valuation is vital too. With a weaker economy, earnings forecasts are unclear right across the market. But there are some valuation measures that can help, and one of them is the Earnings Yield.

Earnings Yield compares a company's profit with its market valuation (worked out by dividing its operating profit by its enterprise value). It gives you a total value of the stock (including its cash and debt), which makes it easier to compare different stocks. As a percentage, the higher the Earnings Yield, the better value the share.

A rule of thumb for a reasonable Earnings Yield might be 5%, and the Earnings Yield for Yancoal Australia is currently 16.1%.

In summary, good quality and relatively cheap valuations are pointers to those stocks that are some of the most appealing to contrarian value investors. It's among these shares that genuine mis-pricing can be found. Once the market recognises that these quality firms are on sale, those prices often rebound.


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Yancoal Australia's StockRank™

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Yancoal Australia's StockRank™

With a StockRank of 98, Yancoal Australia is more attractive than 98% of the 1,896 stocks we cover in Australasia, according to our proprietary ranking system.

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