Contrarian value investors are always on the lookout for stocks that the market has overlooked. In times of economic uncertainty – when stock prices become erratic – good quality stocks can become cheaper. The question is whether Texas Capital Bancshares (NSQ: TCBI) is currently one of them.
Buying good quality stocks at low prices is a popular stock market strategy – but it’s not always easy to tell the difference between a real bargain and one value trap. Often it is the quality stock made everything the difference. While no stock is immune to a sudden setback, focusing on quality and value is what some of the best investors in the world do.
The Texas Capital Bancshares the stock price is currently trading at $53.4. And the promising news is that he has some of the traits that are often associated with of them Influencing factors of investment return: high quality and one relatively cheap valuation.
To understand where they appear, here’s a closer look:
Buy quality at the right price
Good quality stocks are valued by the market because they are more likely to be strong and reliable companies. Profitability is important, but so is the financial strength of the company. A history of improving finances is essential.
One of the quality measures for Texas Capital Bancshares is that it passes 6 of the 9 financial tests in the Piotroski F-Score. The F-Score is a world-class accounting checklist for finding stocks with a trend of improving financial health. A good F-Score suggests that the company has strong signs of quality.
While quality is important, no one wants to pay too much for a stock, so an attractive valuation is also essential. With a weaker economy, earnings forecasts are unclear across the broader market. But there are some valuation metrics that can help, and one of them is earnings yield.
Earnings Yield compares a company’s profit to its market valuation (calculated by dividing its operating profit by its enterprise value). It gives you a total stock value (including its cash and debt), making it easy to compare different stocks. As a percentage, the higher the earnings yield, the better the stock value.
A rule of thumb for a reasonable earnings yield might be 5%, and the earnings yield for Texas Capital Bancshares is currently 7.99%.
In summary, good quality and relatively cheap valuations indicate which stocks are among the most attractive to contrarian value investors. It is among these stocks that we can find real valuation errors. Once the market recognizes that these quality businesses are for sale, these prices often rebound.
What does this mean for potential investors?
Finding good quality stocks at cheap prices is a strategy used by some of the most successful investors in the world. But beware: these factors do not guarantee future returns and we have identified some areas of concern regarding Texas Capital Bancshares which you can read about here.
Stockopedia helps individual investors make confident and profitable choices in the stock market. Our StockRank and Factor Investing Toolkit offers institutional-grade insights on thousands of global stocks. Voted ‘Best Investment Research Tools’ and ‘Best Research Service’ in the 2021 UK Investor Magazine Awards.