2 min read
Shares in Hon Hai Precision Industry Co (TPE:2317) are currently trading at 78.8 but a key question for investors is how the economic uncertainty caused by Coronavirus will affect the price.One way of making that assessment is to examine where its strengths lie...
Hon Hai Precision Industry Co is a player in the Electronic Equipments & Parts sector and itsshare price has moved by -9.59% over the past three months.
In volatile markets, many investors are keen to buy what they think are cheap stocks - but it's essential torecognise the difference between a genuine bargain and a value trap.Often, the quality of the stock makes all the difference.
The good news is thatHon Hai Precision Industry Co scores well against some important financial and technical measures. In particular, it has strong exposure totwo influential drivers of investment returns: high quality and a relatively cheap valuation.
To understand why that matters, here's a closer look:
Buying quality at a fair price
Good quality stocks are loved by the market because they're more likely to be solid, dependable businesses. Profitability is important, but so is the firm's financial strength. A track record of improving finances is essential.
One of the stand out quality metrics for Hon Hai Precision Industry Co is that it passes 6 of the 9 financial tests in the Piotroski F-Score. The F-Score is a world-class accounting-based checklist for finding stocks with an improving financial health trend. A good F-Score suggests that the company has strong signs of quality.
While quality is important, no-one wants to overpay for a stock, so an appealing valuation is vital too. With a weaker economy, earnings forecasts are unclear right across the market. But there are some valuation measures that can help, and one of them is the Earnings Yield.
Earnings Yield compares a company's profit with its market valuation (worked out by dividing its operating profit by its enterprise value). It gives you a total value of the stock (including its cash and debt), which makes it easier to compare different stocks. As a percentage, the higher the Earnings Yield, the better value the share.
A rule of thumb for a reasonable Earnings Yield might be 5%, and the Earnings Yield for Hon Hai Precision Industry Co is currently 11.1%.
In summary, good quality and relatively cheap valuations are pointers to those stocks that are some of the most appealing to contrarian value investors. It's among these shares that genuine mis-pricing can be found. Once the market recognises that these quality firms are on sale, those prices often rebound.
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Now, let's dissect the key concepts and information presented in the article about Hon Hai Precision Industry Co:
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Hon Hai Precision Industry Co (TPE:2317):
- Sector: Electronic Equipments & Parts.
- Share Price Movement: -9.59% over the past three months.
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Assessment of Economic Uncertainty:
- The article raises the question of how the economic uncertainty caused by Coronavirus will affect Hon Hai Precision Industry Co's share price.
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Investor Behavior in Volatile Markets:
- In volatile markets, investors may be attracted to what they perceive as cheap stocks.
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Differentiating Between Bargain and Value Trap:
- Emphasizes the importance of distinguishing between a genuine bargain and a value trap, with stock quality being a crucial factor.
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Quality Metrics for Hon Hai Precision Industry Co:
- The Piotroski F-Score: Hon Hai Precision Industry Co passes 6 out of 9 financial tests, indicating strong signs of financial health improvement.
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Earnings Yield as a Valuation Measure:
- Earnings Yield is used to compare a company's profit with its market valuation (operating profit divided by enterprise value).
- Hon Hai Precision Industry Co's Earnings Yield is currently 11.1%, indicating a better value compared to a rule of thumb of 5%.
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Significance of Quality and Valuation:
- Stresses the importance of combining good quality with relatively cheap valuations, making stocks appealing to contrarian value investors.
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Market Recognition and Stock Prices:
- Suggests that once the market recognizes quality firms on sale, stock prices often rebound, presenting opportunities for contrarian value investors.
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Stockopedia's Tools and Insights:
- The article mentions Stockopedia, a platform offering tools that help investors make informed decisions by providing insights into thousands of global stocks.
- References tools like StockRank and factor investing toolbox.
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Economic Environment Impact:
- Acknowledges the uncertainty in earnings forecasts across the market due to a weaker economy.
In conclusion, the article provides a comprehensive analysis of Hon Hai Precision Industry Co, emphasizing the importance of quality metrics, valuation measures, and the potential opportunities for contrarian value investors. The inclusion of tools like Stockopedia further highlights the commitment to data-driven insights for individual investors.
