Where next for the A2 Milk share price?

Ben Hobson

Stockopedia29 April 2020

Shares in A2 Milk (NZE:ATM) are currently trading at 19.97 but a key question for investors is how the economic uncertainty caused by Covid-19 will affect the price.

The answer comes down to judging whether A2 Milk is well placed to withstand economic shocks and ride out market volatility. To do that, it's essential to look at the profile of the stock to see where its strengths are.

The good news is that A2 Milk scores well against some important financial and technical measures. In particular, it has strong exposure to two influential drivers of investment returns: high quality and strong momentum.

Decades of research shows that good quality stocks are more likely to be resilient, cash-generating businesses that can compound investment returns over time. Likewise, strong momentum in price and earnings is a pointer to stocks with positive trends that have the potential to continue.

GET MORE DATA-DRIVEN INSIGHTS INTO NZE:ATM »

Why quality stocks pay off

When it comes to stock analysis, company quality tends to show up 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 signs of accountancy or bankruptcy risk.

One of the stand out quality metrics for A2 Milk is its 5-year Return on Capital Employed, which is a solid 40.5%. Good, double-digit ROCEs are a pointer to companies that can grow very profitably.

Harnessing the power of 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.

This is true at A2 Milk, where the share price has seen a 45.3% 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, good quality and momentum are pointers to some of the best stocks on the strongest uptrends. This combination of factors can be a clue to finding shares that can 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 knock-down prices.

Find the strongest shares in the stock market

Finding good quality stocks with strong momentum behind them 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.