The Funding Circle Holdings share price

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Quality and value are two important drivers of stock market returns, but many investors don’t take them seriously. In times of economic uncertainty, using these two powerful factors to find stocks could help you navigate market volatility.

the Funding Circle Holdings stock price has moved -27.6% over the past three months and is currently trading at 74.4p. But what’s interesting about this stock is its potential exposure to the influential profit drivers of high quality and one relatively cheap valuation.

This is important because at a time when many investors are looking for cheap stocks, it is important to know the difference between a real bargain and one value trap. The secret is that it is often the quality of the stock that makes everything the difference.

Here is where this difference appears:

Get insights based on data in LON:FCH

Quality you can count on

Good quality stocks are valued by the market because they are more likely to be strong and reliable companies. Profitability is important, but so is the financial strength of the business. A history of improving finances is essential.

One of the measures of quality for Funding Circle Holdings is that it passes 8 of 9 financial tests in the Piotroski F-Score. The F-Score is a world-class accounting checklist for finding stocks with a trend of improving financial health. A good F-Score suggests that the company has strong signs of quality.

Buy at the right price

While quality is important, no one wants to pay too much for a stock, so an attractive valuation is also essential. With a weaker economy, earnings forecasts are unclear across the broader market. But there are some valuation metrics that can help, and one of them is earnings yield.

Earnings Yield compares a company’s earnings to its market valuation (calculated by dividing its operating earnings by its enterprise value). It gives you a total stock value (including its cash and debt), making it easy to compare different stocks. As a percentage, the higher the earnings yield, the better the stock value.

A rule of thumb for a reasonable earnings yield might be 5%, and the earnings yield for Funding Circle Holdings is currently 23.0%.

In summary, good quality and relatively cheap valuations indicate which stocks are among the most attractive to contrarian value investors. It is among these stocks that we can find real valuation errors. Once the market recognizes that these quality businesses are for sale, these prices often rebound.

What does this mean for potential investors?

Finding good quality stocks at cheap prices is a strategy used by some of the most successful investors in the world. But beware: these factors are not guarantees of future returns and we have identified some areas of concern regarding Funding Circle Holdings which you can read about here.

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