Shares in Softcat (LON:SCT) are currently trading at 1196 but the question for investors is how much the market chaos of 2020 will impact on its price.
The answer comes down to judging whether Softcat is well placed to ride out economic shocks and market volatility. To do that, you have to look at its profile to see where its strengths lie.
Softcat is a significant player in the market's IT Services & Consulting sector. The good news is that it scores well against some important financial and technical measures. In particular, it has strong exposure to two influential drivers of investment returns: high quality and strong momentum.
Here is why that's is important...
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 stand out quality metrics for Softcat is its 5-year Return on Capital Employed, which is a solid 57.4%. 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.
This is true at Softcat, where the share price has seen a 51.3% 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 knock-down prices.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.