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AlphaScreens: Quality throws up more questions

GDP figures show the UK has narrowly avoided recession, but how many resilient and quality companies still look attractive?
AlphaScreens: Quality throws up more questions

Only 1 per cent year-on-year growth for the UK economy in Q3 2019 was actually not a bad result given the failure to resolve Brexit. In uncertain times it is reassuring to hold shares in quality businesses with solid business models and robust cash flows. 

  • This month, 14 FTSE All Share companies pass all nine of our quality tests. Four of these have been well appreciated by the market over the past three months: Games Workshop (GAW), Countryside Properties (CSP), Polypipe Group (PLP), and technical products business Diploma (DPLM) have all enjoyed double-digit share price gains.
  • It’s also useful to look at the companies failing just one or two tests, to give clues where to focus next stage research. Ten companies fail just our return on equity criteria and four fail the forward earnings forecast test.
  • Small companies’ share prices are usually more volatile and doing well on a quality screen is not a signal of long-term stability, rather it’s a way of assessing whether the risks are likely to pay off over time. Specialist food business Devro (DVO) gets 9/9 on the small-cap screen but the shares have lost nearly 20 per cent in the last three months.
  • On Aim, road insurance services business Redde (REDD) has had its troubles this year but does well on our screen – although potential investors may want to wait for signs of a turnaround. Table top goods specialist Churchill China (CHH) and cloud comms business Gamma Communications (GAMA) also get top marks.
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