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AlphaScreens: Quality trends show signs of slowing

The most commonly failed tests are yet another late-cycle indicator.
August 22, 2019

Once again, there is little movement in the large cap companies cutting the mustard by our quality screen. Luxury goods and fashion group Burberry (BRBY), equipment rental firm Ashtead (AHT), engineer Spirax-Sarco (SPX) still pass all the tests as do Diageo (DGE) and Imperial Brands (IMB), flying the quality flag for booze and fags, respectively.

  • One notable faller is consumer goods giant Unilever (ULVR) – sales growth expectations were missed when it reported half year results at the end of July and the company now fails the forward earnings and PE tests.
  • A lot of companies fail just one test, with many falling down on return on equity (ROE) growth over the past two years or expected EPS growth over the next two years.
  • On Aim, the notable faller is Fevertree Drinks (FEVR), which now fails ROE growth – a 20 per cent drop in its share price in the last three months suggests investors are already questioning the sustainability of its growth story.
  • If we ever needed reminding screens aren’t infallible, we need look no further than packaged holiday operator On the Beach (OTB) ranking well in the small-cap and All Share screens. This might be a value play but, a cyclical business so vulnerable to external factors like the currency movements that sparked profit warnings is hardly quality.
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