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Always take a look under the hood of 'quality' companies

Some companies look good investments based on headline data, but beauty can be skin deep.
Always take a look under the hood of 'quality' companies

The three stocks selected for review showed up positively the last time we ran the Alpha quality screen. All look good based on margins, consensus expectations and history; however, it is always wise to lift the hood and check that the engine is in as good working order as expected.

Points to check include that headline reported profits adequately reflect the true trading environment and that even well-established market dynamics are not about to change. On close inspection, the quality investment case for some companies can be found to have weaknesses. 

  • Auto Trader. The second-hand car market is having something of a purple patch with a post-Covid rebound combined with a shortage of new vehicle registrations (driven by the chip shortage). However, the underlying market for used cars has been in gentle decline for some time, and that may gather pace. This leaves Autotrader with a need to drive its ARPC ever higher in what threatens to become a more competitive market. An ultra-dominant market position may not be enough to sustain growth as has become the expectation here.  
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