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Hunting for quality shares at a reasonable price

Earnings growth rates are important as well as historic financial strength
Hunting for quality shares at a reasonable price
  • Many quality shares remain expensive
  • Forward growth rates are important in weighing up what's worth paying up for. 

The quality shares approach has many firm advocates but the drawback in recent years has been the price investors have been asked to pay for these companies. Many of the top ranking shares on our quality screen this month are valued on long multiples of analysts’ estimates of their future earnings. 

IT consulting and solutions business Kainos Group (KNOS) is rated at 52 times its next twelve months’ forecast earnings. That looks pretty steep given the forecast growth rate for earnings for the current year is just 1.5 per cent; and for the following year it’s only 6.5 per cent. No surprise then that Kainos failed our price-to-earnings growth (PEG) test this month. 

Hikma Pharmaceuticals (HIK) shares have had a somewhat turbulent ride in 2021 but this is a business that passes all nine of our screen’s tests but with a rating of 16 times NTM earnings, isn’t too expensive. It’s a business that seems to have secular advantages given it produces cheaper versions of drugs out of patent and should also benefit from a shift to in-country supply chains.  With EPS growth of around 14 per cent forecast for both the current and next financial years, HIK still looks interesting. 

Famous quality stalwart Diageo (DGE) is priced expensively like many of its premium drink brands.  It is rated at 28 times next twelve month earnings forecasts. In terms of the forecast earnings growth rate, that looks healthy for this and the next financial year. Diageo fails our test to have improved its operating margin compared to two years ago, but perhaps investors could forgive that given the pandemic. This business has shown the enduring quality characteristics to be worth keeping on a watchlist for any further stock market dips.

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