What Factors Will Move The Paypoint Share Price?

Shares in Paypoint (LON:PAYP) (LON:PAY) are currently trading at 635 but a key question for investors is how the economic uncertainty caused by Coronavirus will affect the price. One way of making that assessment is to examine where its strengths lie...

The Paypoint share price has moved by -16.7% over the past three months. In volatile markets, many investors are keen to buy what they think are cheap stocks - but it's important to recognise the difference between a genuine bargain and a value trap. Often, the quality of the stock makes all the difference.

The encouraging news is that it has at least some of the traits that are often associated with two influential drivers of investment returns: high quality and a relatively cheap valuation.

To understand why that matters, 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 Paypoint is that it passes 6 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 Paypoint is currently 13.8%.

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.

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.

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