Economic shockwaves caused by Covid-19 have plunged the economy into turmoil, but some shares are better able to absorb this uncertainty than others - but could Trex Inc (NYSE:TREX) be one of them?
To understand why different shares respond to chaos in different ways, it pays to look at their strengths...
In bull markets, investors tend to gravitate to more speculative growth stocks as a means of achieving the best returns. But these stocks can collapse early in a crisis.
By contrast, high quality shares often get overlooked in bull markets. But it's these that are often better at keeping their momentum and recovering quickest from periods of volatility.
Shares in Trex Inc are currently trading at 144.44 but a question in the minds of many investors is how the price will respond to the Covid-19 uncertainty.
The answer is that there are some positive signs. Trex Inc appears to score well against some important financial and technical measures and has at least some exposure to two influential drivers of investment returns: high quality and strong momentum.
So why are these two factors important and where are the clues hidden?
High quality
When it comes to stock analysis, company quality tends to be revealed in high profitability and strong industry-leading margins. These kinds of firms are stable, growing and often have accelerating sales and earnings. They also have strong and improving financial histories with no obvious signs of accountancy or bankruptcy risk.
One of the quality metrics for Trex Inc is its 5-year Return on Capital Employed, which is 50.1%. Long-term, double-digit ROCEs can be a hallmark of companies with the power to grow very profitably.
Strong momentum
Positive momentum trends show up in share prices and earnings growth. You can find the clues in stocks that are trading close to their 52 week high prices and outperforming the market. They’ll often be beating broker estimates and getting forecast upgrades and recommendation changes.
There are signs of this at Trex Inc, where the share price has seen a 48.1% return relative to the market over the past 12 months. Market volatility and economic uncertainty can be a major drag on momentum, but previously strong stocks can be quick to recover when confidence returns.
In summary, a combination of high quality and momentum can be clues in the search for shares with the potential to deliver solid investment profits over many years.
In good times, these shares can become expensive to buy. But in volatile markets, there may be chances to buy them at cheaper prices.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.