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AlphaScreens: Quality trend signals

Quality tests don't always scream buy but they really help you ask questions.
AlphaScreens: Quality trend signals

Stock screens rightly carry the health warning that they are just the starting point for research - just buying every stock that scores well is no guarantee of success. What they do, however, is give a wonderful discipline in monitoring financial performance trends of companies on your watch list. 

  • Large Cap shares getting full marks on our quality screen this month include Diageo (DGE), Burberry (BRBY), RELX (REL) and Spirax-Sarco (SPX).
  • When quality companies have been on a good run, they can get very expensive on trailing measures but that may be because investors believe in the business. This seems to be the case with Avon Rubber (AVON), which makes specialist security and military equipment. It’s too expensive on our trailing PE test but the forecast for earnings is up. It also fails the criteria of having to grow return on equity over the past two years. That said, its ROE is consistently high in absolute terms.
  • On Aim, trends in quality tests are a guide to sense check a potential investment. Last month we questioned the timing of getting back into the cheap shares of vehicle replacement specialist Redde (REDD), which had full marks on the screen. This month it fails the forecast EPS growth test, suggesting there need to be more signs of a turnaround to seriously consider buying the shares.
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