Two reasons why the market is missing a trick with CF Industries Holdings Inc – Stockopedia

Buying quality merchandise when it's on sale is a stock market strategy used by some of the greatest investors in the world - including Warren Buffett. After theturmoil we've seen in 2020, there are signsthat stocks likeCF Industries Holdings Inc(NYQ:CF) could fit that bill. But how can you tell?

TheCF share price has moved by-37.3%over the past three months and its currently trading at24.59.

In volatile conditions,many investors are keen to buy what they think are cheap stocks- but this can be a mistake. It's importantknow the difference between a genuine bargain and a value trap - and often, the quality of the stock makes all the difference.

The good news is thatCF scores well against some important financial and technical measures.It's a large-cap share with strong exposure to twovery influential drivers of investment returns: high quality and a relatively cheap valuation.

To understand where that shows up,here's a closer look:

GET MORE DATA-DRIVEN INSIGHTS INTO NYQ:CF

Good quality stocks are loved by the market because they'remore likely to be solid, dependable businesses. Profitability is important, but so is the firm'sfinancial strength. A track record of improving finances is essential.

One of the stand out quality metrics forCFis that it passes8of the9 financial tests in the Piotroski F-Score. The F-Score is a world-class accounting-based checklist for findingstocks with an improving financial health trend. A good F-Score suggests that the company has strong signs ofquality.

While quality is important, no-one wants to overpay for a stock, so an appealingvaluation 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 Yieldcompares a company's profit with itsmarket valuation (worked out by dividing itsoperating profit by its enterprise value). It gives you a total value of the stock (including its cash and debt), which makes it easier to comparedifferent stocks. As a percentage, the higher the Earnings Yield, the better value the share.

A rule of thumb for a reasonable Earnings Yield might be5%, and theEarnings Yield forCFis currently8.06%.

In summary, good quality and relatively cheap valuations are pointers to those stocks that aresome of themost 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.

Finding good quality stocks at attractive prices is a strategy used by some of the world's most successful investors. If you want to find more shares that meet these rules, you can see a comprehensive list on Stockopedia's StockRanks page.

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Two reasons why the market is missing a trick with CF Industries Holdings Inc - Stockopedia